The Effects of Clients' Controversial Activities on Audit Pricing

Posted: 25 Oct 2012

See all articles by Kevin Koh

Kevin Koh

Nanyang Technological University (NTU) - Nanyang Business School

Yen H. Tong

Nanyang Technological University (NTU) - Nanyang Business School

Date Written: October 24, 2012

Abstract

We examine the effects of clients’ involvement in controversial corporate activities on audit pricing. Clients’ involvement in controversial activities raises concerns about management integrity and ethics. Moreover, clients involved in such activities are perceived to have higher risk of adverse financial performance. As a result, there is greater potential for financial misstatement, which increases the auditor’s perceived business risk. We hypothesize that, given the higher perceived business risk, auditors charge higher fees to clients engaged in controversial activities. Using a unique dataset from Kinder, Lydenberg, and Domini, we identify clients that engage in controversial activities related to consumers, employees, the community, and the environment. Consistent with our hypothesis, we find that clients involved in controversial corporate activities pay higher audit fees compared to clients not involved in such activities.

Keywords: audit fees, audit pricing, corporate social responsibility (CSR), controversial corporate activities, business risk, financial misstatement

Suggested Citation

Koh, Kevin and Tong, Yen H., The Effects of Clients' Controversial Activities on Audit Pricing (October 24, 2012). Auditing: A Journal of Practice & Theory, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2166651

Kevin Koh (Contact Author)

Nanyang Technological University (NTU) - Nanyang Business School ( email )

S3-B2C-96, Nanyang Avenue
Nanyang Business School , NTU
Singapore, 639798
Singapore
(+65) 6790 4096 (Phone)

Yen H. Tong

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Singapore 639798
Singapore
65-6790-5743 (Phone)

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