Litigation Risk and Audit Fees: Evidence from UK Firms Cross-Listed on U.S. Exchanges

Abstract

This study re-examines the relationship between litigation risk and audit pricing. Two necessary ingredients to empirically examine this relationship are (a) a litigious legal environment, and (b) publicly disclosed auditor remuneration. Prior studies have not been able to comprehensively examine this relationship because the most litigious country in the world, the U.S., does not require auditor remuneration to be publicly disclosed. Conversely, countries that require companies to disclose auditor remuneration in their financial statements (e.g., Hong Kong, Australia, and the UK) typically have a relatively benign litigation environment. In this study, we straddle publicly disclosed auditor remuneration and a highly litigious environment by focusing on UK firms cross-listed on U.S. stock exchanges. We find that, after controlling for other factors, UK firms tend to charge higher fees for their services when their clients are cross-listed on major U.S. stock exchanges. We, however, find no evidence of higher audit fees when UK firms cross-list on non-U.S. foreign exchanges. These findings are consistent with the prediction that audit fees will reflect risk differences across liability regimes.

JEL Classification: M49, L84, G15, K22