The cost of sin: The effect of social norms on audit pricing

Abstract

In this paper we provide evidence for the effects of social norms on audit pricing by studying companies belonging to the alcohol, firearms, gambling, military, nuclear power, and tobacco industries, which are often described as "sin" companies. We hypothesize that the disparities between "sin" firms operations and prevailing social norms create an adverse context which heightens the client's business risk assessment by auditors and is, thereby, reflected in the pricing decisions for audit and consulting services. Having controlled for the impact of variables relating to client attributes, auditor attributes and engagement attributes, we demonstrate that audit firms charge significantly higher audit and consulting fees to companies that deviate from prevailing social norms. Additionally, we show that audit pricing levels within the "sin" group depend both on prevailing political views and on the level of "vice" exhibited by "sin" companies.

The Social Stigma Premium in Executive Compensation in Sin Firms

“…Third, our study adds evidence to the nascent literature that examines how social norms affect firm economic performance and internal processes (Chong et al 2006;McGuire et al 2012;Hong and Kacperczyk 2009;Leventis et al 2013;Liu et al 2014). Specifically, we show that one channel through which social norms affect economic performance is labor contracting: a firm breaking social norms has to offer higher compensation to its employees.…”

“…Negative public attitude towards tobacco relates to medical evidence in 1960s on the link between cigarette smoking and cancer. Social stigma stems from addictive and pathological effects sin industry products have on consumers, their families and communities (Anielski and Braaten 2008;Galvin et al 2004;Gerstein et al 2004;Grinols 2004;Hudson 2008;Leventis et al 2013).…”

Corporate Social Responsibility Reporting and Organizational Stigma: The Case of “Sin” Industries

“…"Sin" industries are stigmatized due to firmly-established perceptions that their core activities deviate from widely-endorsed standards of organizational behavior (Leventis et al, 2013). Alcohol, tobacco and gambling firms have long been denounced for the addictive nature of their products and services and the devastating social impact on families and communities (Galvin et al, 2005;Grinols, 2004;Hudson, 2008;Vergne, 2012).…”

“…Against this background, we bring to the fore the alcohol, tobacco, gambling, nuclear energy and firearms industries, often referred to as "sins" due to their core activities (Leventis, Iftekhar, & Dedoulis, 2013). Firms belonging to "sin" sectors ceaselessly strive to lessen the impact of core-stigmatization (Galvin et al, 2005;Hudson & Okhuysen, 2009) and are worthy of attention since their defensive strategies constitute prime examples for various firms confronting severe reputational challenges (see Brown, 2014).…”

Smoke screen? The globalization of production, transnational lobbying and the international political economy of plain tobacco packaging

“…alcohol, arms production and gambling), is characterized as a ‘sin’ industry. Such industries face higher audit costs (Leventis et al 2013) and are undervalued on stock exchanges (Fauver and McDonald, 2014), but they are also disadvantaged in terms of access to policy makers and mobilizing political support. Rather than facing competitor companies in disputes over policy, as in the classic view of trade disputes (Baron, 1997), morally suspect industries face counteractive lobbying from civil society actors like NGOs, doctors and academics.…”