Weathering the Weather: Does Extreme Weather Affect the Cost and Delay of an Audit?
48 Pages Posted: 11 Mar 2021
Date Written: March 10, 2021
We examine the impact of extreme weather events on the cost and delay of an audit. We match the location of extreme weather from the National Centers for Environmental Information Storm Events database to firms with headquarters in the same metropolitan statistical area (MSA) as the extreme weather. We then count the number of days each year a firm experiences an extreme weather event of any type in its MSA to measure the impact. We find that auditors charge significantly higher fees and take significantly longer to complete the audit for firms experiencing more versus fewer extreme weather days. The effect of extreme weather on audit fees and report lags is more pronounced for events occurring after the fiscal yearend but before the audit report date and for local auditors in the same MSA as the client firm. Our main findings of higher audit cost and delay are most consistent with extreme weather events requiring auditors to provide additional audit services to assess the risks and complexities of extreme weather in clients’ financial statements. Additionally, we find that almost all extreme weather types cause higher audit fees and longer report lags. Client firms that disclose extreme weather-related information in the risk sections of 10-Ks have lower audit fees, and shorter report lags, possibly due to a reduction of audit risk associated with proactive risk disclosure.
Keywords: Audit cost, audit delay, audit effort, extreme weather, audit fees, metropolitan statistical area
JEL Classification: Q54, Q56, M42
Suggested Citation: Suggested Citation