Link to the article

Corruption and audit fees: New evidence from EU27 countries

Markus Mottinger

First published: 15 May 2024

https://doi.org/10.1111/ijau.12349

Abstract

This study examines the relationship between country-level corruption and audit pricing decisions across EU27 countries. Using a sample of 29,607 firm-year observations for the period 2011–2021, I find that firms headquartered in more corrupt countries pay higher audit fees and have longer reporting lags. I also show that this relationship is stronger after the EU audit reform came into force in 2016. The results suggest that auditors respond to corruption risk stemming from the broader macroeconomic environment by increasing audit fees and audit effort. In additional analyses, I show how the association between audit fees and corruption varies across firm industries, and I document that female engagement partners tend to be more sensitive to corruption risk than their male counterparts. Ultimately, I find unexpected evidence indicating that financial reporting quality, proxied by discretionary accruals, is not adversely affected by corruption. This study addresses prior calls for a more granular understanding of external factors in audit research and provides the first European evidence of the association between corruption and auditor responses. The implications of this study should be particularly relevant for researchers, market participants and regulators.

Excerpt citing Namsor

To shed light on this question, I augment the audit fee model by including an interaction term between COR and a dummy variable Female, which takes the value of 1 if the lead engagement partner is a woman and 0 otherwise. I construct Female based on the lead engagement partner’s name provided in Audit Analytics and use the software Namsor to assess the sex associated with the engagement partner’s name (Fung et al., 2022; Sebo, 2021).

Caption by DALL-E : illustration for the article titled “Corruption and audit fees: New evidence from EU27 countries.” It portrays the key themes of corruption and the audit process within the EU context.

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