Unintended Costs of a Dual Regulatory Environment: Evidence from State-Level Cannabis Legalization and Bank Audit Fees

Posted: 14 Apr 2020

See all articles by James Brushwood

James Brushwood

Colorado State University, Fort Collins - Department of Accounting

Curtis M. Hall

Drexel University - Bennett S. LeBow College of Business

Eric T. Rapley

Colorado State University, Fort Collins - Department of Accounting

Date Written: March 9, 2020

Abstract

Since 2014, a number of U.S. states have legalized business activities related to the production, distribution, and use of recreational cannabis. These activities remain illegal at the U.S. federal level, creating a dual regulatory environment. The uncertainty related to the enforcement of federal cannabis laws affects businesses located in legalizing states, particularly federally-insured banks. Applying a difference-in-differences approach to a matched sample of banks in legalizing and non-legalizing states, we document an increase in audit fees incurred by banks located in legalizing states after cannabis legalization. This finding is consistent with increased auditor effort and engagement risk being an unintended consequence of state-level recreational cannabis legalization. In supplemental analysis, we find that the relation between banks’ audit fees and cannabis legalization was greater for banks having larger increases in banking activity, suggesting that audit fees increased primarily for banks that may be engaging in relationships with cannabis-related businesses.

Keywords: Audit fees; Banking; Cannabis legalization; Conflicting regulatory environment; Enforcement uncertainty

JEL Classification: G28, M42, M48

Suggested Citation

Brushwood, James and Hall, Curtis M. and Rapley, Eric T., Unintended Costs of a Dual Regulatory Environment: Evidence from State-Level Cannabis Legalization and Bank Audit Fees (March 9, 2020). Journal of Accounting and Public Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3559909

James Brushwood (Contact Author)

Colorado State University, Fort Collins - Department of Accounting ( email )

256 Rockwell Hall
Fort Collins, CO 80523
United States

Curtis M. Hall

Drexel University - Bennett S. LeBow College of Business ( email )

Philadelphia, PA 19104
United States

Eric T. Rapley

Colorado State University, Fort Collins - Department of Accounting ( email )

257 Rockwell Hall
Fort Collins, CO 80523
United States
970.491.7481 (Phone)

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