Bribes and audit fees

María Gutiérrez Urtiaga (Universidad Carlos III de Madrid)
Stavriana Hadjigavriel (CUNEF University)
Susana Susana Gago Rodríguez (ICADE Universidad Pontificia de Comillas)

Abstract

We exploit the UK Bribery Act 2010 to test whether the pricing of audit services changes with the risk of the client firm engaging in bribery. Adopting a triple-difference design, we show that subject firms operating in countries perceived as more corrupt, where bribery may be necessary to get contracts, pay higher audit fees following the enforcement of the law. We also observe no change in the audit fees for client firms operating in low corruption environments and are also subject to the law. Moreover, we show that the increase in audit fees is not mainly driven by higher compliance costs or by a change in the financial reporting quality. The results indicate that the increase in audit fees after the passage of the UK Bribery Act for subject firms operating in high corruption environments is in compensation for the higher potential litigation and reputation costs for the auditors working for these client firms.

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