Bribes and Audit Fees

101 Pages Posted: 5 Apr 2020 Last revised: 19 Jun 2020

See all articles by María Gutiérrez Urtiaga

María Gutiérrez Urtiaga

Universidad Carlos III de Madrid-Departamento de Economía de la Empresa; European Corporate Governance Institute (ECGI)

Stavriana Hadjigavriel

Universidad Carlos III de Madrid - Universidad Carlos III de Madrid

Susana Gago Rodríguez

Universidad Carlos III de Madrid - Department of Business Administration

Date Written: March 10, 2020

Abstract

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

Gutiérrez Urtiaga, María and Hadjigavriel, Stavriana and Gago Rodríguez, Susana, Bribes and Audit Fees (March 10, 2020). European Corporate Governance Institute – Finance Working Paper No. 683/2020, Available at SSRN: https://ssrn.com/abstract=3552122 or http://dx.doi.org/10.2139/ssrn.3552122

María Gutiérrez Urtiaga

Universidad Carlos III de Madrid-Departamento de Economía de la Empresa ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34-91 624 58 40 (Phone)
+34-91 624 96 07 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Stavriana Hadjigavriel (Contact Author)

Universidad Carlos III de Madrid - Universidad Carlos III de Madrid ( email )

Calle Madrid 126
Universidad Carlos III de Madrid (room 15.2.42)
Getafe, Madrid 28903
Spain

Susana Gago Rodríguez

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid, 126
Getafe, Madrid, Madrid 28903
Spain
+34-91 624 58 34 (Phone)
+34-91 624 96 08 (Fax)

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