We examine auditors' consideration of audit risk information from the disclosure of alleged financial statement fraud (FSF) by investigating whether audit fees are higher for firms that allegedly committed fraud and for firms with ongoing FSF challenges and high short interest. We find a positive association between audit fees and FSF disclosures, and this association increases with the level of short interest. Auditors also consider ongoing FSF challenges reflected in the level of short interest when determining their audit fees. We find, however, that short sellers do not consider increased audit fees associated with the public disclosure of alleged FSF. Short sellers do not appear to contemplate audit fees and audit risk in analyzing the business risk of alleged FSF in determining their short positions. Our study has policy, practical, and educational implications for auditors, short sellers, and forensic accountants who investigate FSF.

Data Availability: The data used in this study are available from the sources identified in the study.

JEL Classifications: G32, M40, M42.

Keywords:
financial statement fraud, short selling, audit opinion, capital market reaction, short interest, audit fees, audit effort, public disclosure
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