U.S. Political Corruption and Audit Fees

Abstract

Using data on corruption convictions from the U.S. Department of Justice, we find that auditors charge higher fees when a firm is headquartered in a more corrupt district. This result is robust to a wide range of time and location fixed effects, using capital city isolation as an instrument, and propensity score matching. We also find that, relative to those in non-corrupt districts, firms in corrupt districts are more likely to have weak internal controls and to restate earnings and that their auditors exert greater effort. This evidence suggests that auditing firms in corrupt areas entails additional risk, which auditors price into fees.

Islamic Religious Atmosphere and Audit Pricing: Evidence from Iran

“…In fact, this result indicates that managers in regions with a stronger religious atmosphere adopt risk‐averse, conservative, and non‐fraudulent attitudes, which directly affect audit fees. Furthermore, this study contributes to the literature (e.g., Gul & Ng, 2018; McGuire et al., 2012; Zaman et al., 2018) in terms of the economic consequences of religion, particularly Islam, as well as less specialized literature (Callen & Fang, 2020; Jha et al., 2020) on the external and informal factors affecting audit fees. In addition, the present study contributes to the literature limited to the American context (i.e., Gul & Ng, 2018; Leventis et al., 2018) by providing new evidence of the relationship between the local community's religious atmosphere and audit fees in an Islamic country.…”

“…Second, following Jha et al. (2020), we run the research model using only the variable of interest. Then, we compare the coefficient of the variable of interest in this model with the coefficient of the variable of interest in the main model (i.e., including all control variables).…”

“…The relevance of interdisciplinary business research and how the firm's environment affects auditing has been highlighted in prior research (Jeacle & Carter, 2014; Jha et al., 2020). We examine the impact of Islamic religious atmosphere on audit pricing.…”

“…Based on discussions about SNT, companies located in regions with a stronger religious atmosphere have more ethical behaviors, and their financial statements are more reliable (Gul & Ng, 2018). Consequently, in regions with a strong religious atmosphere, auditors may assess a much lower engagement risk due to the more ethical attitudes adopted by firm managers (Jha et al., 2020). Such lower engagement risk influences audit planning in terms of the nature, timing, and extent of audit procedures (Houston et al., 1999; Leventis et al., 2018).…”

“…There are two further arguments in favor of a possible negative association between the religious atmosphere and audit fees. First, since people in areas with a strong religious atmosphere are less likely to engage in immoral and opportunistic behavior (Gul & Ng, 2018; Jha et al., 2020; Leventis et al., 2018), it is expected that stakeholders living in areas with a strong Islamic religious atmosphere may be less concerned about opportunistic behaviors in financial reporting, which may make them less willing to pay high audit fees. Second, auditors are likely to make less effort to gather sufficient and convincing audit evidence in companies located in areas with a strong religious atmosphere, as auditors may also assume that third parties in the local community (such as suppliers, banks, and customers) are influenced by the useful features of the local community's religious atmosphere (such as honesty, fairness, or responsibility).…”