Trust of the Crowd and Audit Pricing

Abstract

Using a novel dataset that captures public perceptions of the trustworthiness of client firms by extracting and converting social media feeds into an index, we find that auditors charge higher fees for client firms with lower trustworthiness, as client firms with higher trustworthiness are less likely to incur lawsuits. This correlation is stronger for the shorter audit tenures, younger client firms, and more complex auditing practices after the enactment of the SOX Act. Our results are robust to:

(i) including firm or county fixed effects,

(ii) controlling for the internal control weaknesses and various corporate governance measures, and

(iii) adding the trust index constructed from financial news.

Our study highlights the role of the perceived trustworthiness of client firms in audit pricing decisions.

Keywords: audit pricing, trustworthiness, social media, natural language processing, textual analysis

JEL Classification: G30, G41, M14, M42, Z10