How Do Auditors Respond to FCPA Risk?
54 Pages Posted: 4 Mar 2018 Last revised: 30 Nov 2018
Date Written: November 28, 2018
Using a sample of public firm FCPA violations, we investigate how auditors respond to FCPA risk. We find that audit fees are higher for FCPA violators beginning in the violation period with an additional increase during the period in which regulatory investigations occur. Fees exhibit a greater sensitivity to payables and SG&A expenses for FCPA violators than for non-violators, suggesting that auditors adapt their procedures for accounts that have the highest likely FCPA risk. We also find evidence of a contagion effect with respect to FCPA risk and audit fees among non-violating peers of FCPA violators. Finally, we show that many of the relationships we document for FCPA violators exist among non-violating firms with elevated foreign bribery risk as well, but in magnitudes that are smaller than those of confirmed FCPA violators. Our findings suggest that auditors do increase effort in response to FCPA risk but that updates to AS 2405 may be advisable.
Keywords: Foreign Corrupt Practices Act, audit fees, business risk, bribery, contagion, peer firms, illegal acts, FCPA
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