Bribes and Audit Fees
101 Pages Posted: 5 Apr 2020 Last revised: 19 Jun 2020
Date Written: March 10, 2020
We exploit the UK Bribery Act of 2010 to test whether the pricing of audit changes with the level of corruption/bribery in the firm’s business environment. Adopting a triple difference design, we show that affected firms operating in countries perceived as more corrupt, where bribery may be necessary to get contracts, pay higher audit fees after the law enforcement. Moreover, we show that the increase in audit fees (i) is not the result of changes in the financial reporting quality of these firms; (iii) is mainly driven by Big-4 auditors; and (iii) is not due to higher compliance costs for companies that have a larger number of subsidiaries in corrupt countries. All these results are consistent with the increase in audit fees as a compensation for the higher perceived litigation and reputational costs for the auditors, rather than an additional price paid for significant increases in the compliance and monitoring costs. Moreover, subject firms that operate in countries with low corruption indexes and low bribery risk experience a reduction in audit fees, suggesting that the law was effective in reducing bribery, at least for firms with lower exposure to bribery in its business environment. In this case the reduction in the litigation/reputational risk for the auditor was high enough to compensate any potential increase in compliance/monitoring costs and potential penalties.
Keywords: Audit Fees; Audit Quality; Corruption; Bribes; UK Bribery Act 2010
JEL Classification: K420, M4, M410, M420, M480, M140
Suggested Citation: Suggested Citation