Weathering the Weather: Does Extreme Weather Affect the Cost of an Audit?
51 Pages Posted: 11 Mar 2021 Last revised: 16 Jun 2021
Date Written: June 15, 2021
We examine the impact of extreme weather events on the cost of an audit. We measure impact as the number of days per year a firm experiences an extreme weather event of any type (e.g., drought, floods, storms, wildfires) in its metropolitan statistical area (MSA). We first find that auditors charge significantly higher fees for firms exposed to more extreme weather days in the past, suggesting that auditors consider previous extreme weather risk exposure a material business risk. No one weather type dominates this finding. Second, auditors charge higher fees for firms experiencing abnormal increases in extreme weather days contemporaneously. This positive relation also strengthens for unanticipated weather events occurring after the fiscal yearend but before the audit report date. Third, we find that extreme weather events generate significantly higher audit fees when the auditor and the client locate in the same MSA.
Keywords: Audit cost, audit risk, audit effort, extreme weather, audit fees, metropolitan statistical area
JEL Classification: Q54, Q56, M42
Suggested Citation: Suggested Citation