Does Corporate Culture Impact Audit Pricing? Evidence from Textual Analysis

Journal of Business Finance & Accounting

50 Pages Posted: 25 Oct 2021

See all articles by Huimin (Amy) Chen

Huimin (Amy) Chen

University of Massachusetts Lowell - The Robert J. Manning School of Business

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Tahseen Hasan

affiliation not provided to SSRN

Qiang Wu

Hong Kong Polytechnic University-School of Accounting and Finance

Date Written: October 21, 2021

Abstract

This study examines whether auditors incorporate their clients’ corporate culture into audit pricing. We construct a measure of corporate collaboration culture using textual analysis of public firms’ 10-K reports. We find that firms with more collaboration culture pay lower audit fees. We argue that firms with a culture of collaboration emphasize harmony among people, leading to lower litigation risk, which lowers auditor risk premiums. Collaboration culture also encourages employees’ reporting of errors and problems, leading to lower control risk, which lowers audit risk premiums. Using path analysis and a structural equation model, our findings support the argument. Moreover, we do not find evidence supporting alternative explanations of reduced audit quality and significant auditor changes. The negative relation between collaboration culture and audit fees is robust to multiple alternative measures of collaboration culture, but we caution about the interpretation of the economic significance of our finding.

Keywords: Corporate Culture, Collaboration Culture, Audit Fees, Audit Risk, Textual Analysis

JEL Classification: M42, Z1

Suggested Citation

Chen, Huimin (Amy) and Francis, Bill B. and Hasan, Tahseen and Wu, Qiang, Does Corporate Culture Impact Audit Pricing? Evidence from Textual Analysis (October 21, 2021). Journal of Business Finance & Accounting, Available at SSRN: https://ssrn.com/abstract=3946750

Huimin (Amy) Chen

University of Massachusetts Lowell - The Robert J. Manning School of Business ( email )

One University Avenue
Lowell, MA 01854
United States

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

Troy, NY 12180
United States

Tahseen Hasan

affiliation not provided to SSRN

Qiang Wu (Contact Author)

Hong Kong Polytechnic University-School of Accounting and Finance ( email )

5182095596 (Phone)
12047-4974 (Fax)

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