How Do Auditors Respond to FCPA Risk?

54 Pages Posted: 4 Mar 2018 Last revised: 30 Nov 2018

See all articles by Bradley Lawson

Bradley Lawson

Oklahoma State University - Stillwater - School of Accounting

Gerald S. Martin

American University - Kogod School of Business

Leah Muriel

Oklahoma State University - Stillwater - Spears School of Business

Michael S. Wilkins

University of Kansas

Date Written: November 28, 2018

Abstract

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

Suggested Citation

Lawson, Bradley and Martin, Gerald S. and Muriel, Leah and Wilkins, Michael S., How Do Auditors Respond to FCPA Risk? (November 28, 2018). Available at SSRN: https://ssrn.com/abstract=3127265 or http://dx.doi.org/10.2139/ssrn.3127265

Bradley Lawson

Oklahoma State University - Stillwater - School of Accounting ( email )

College of Business Administration
415 Business Building
Stillwater, OK 74078
United States

Gerald S. Martin

American University - Kogod School of Business ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-3914 (Phone)

Leah Muriel

Oklahoma State University - Stillwater - Spears School of Business ( email )

201 Business
Stillwater, OK 74078-0555
United States

Michael S. Wilkins (Contact Author)

University of Kansas ( email )

Capitol Federal Hall
1654 Naismith Dr.
Lawrence, KS 66045
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
89
rank
270,394
Abstract Views
382
PlumX Metrics