Political Corruption and Auditor Behavior: Evidence From U.S. Firms

Abstract

This paper investigates the impact of political corruption on auditor behavior in the United States. We find that U.S. firms headquartered in more corrupt regions pay higher audit fees, have longer audit report lags, and are more likely to receive a going concern audit opinion. Political corruption is a manifestation of a weak institutional environment and, as such, weakens the rule of law. In addition, political corruption erodes the public’s belief in a political system and reduces interpersonal trust. Our results suggest that auditors assess the risk and trustworthiness of their clients based on where firms are headquartered. The results are robust to using a 2SLS regression analysis and a propensity-score-matched sample. This study extends the prior research on political corruption and the client risk management strategies used by external auditors. Moreover, the current study will be helpful to regulators considering the more explicit role of external auditors in corruption risk assessment.

Keywords: political corruption; audit fees; audit report lag; going concern audit opinion