Bribes and Audit Fees

Abstract

We exploit the UK Bribery Act of 2010 to test whether the pricing of audit changes with the level of corruption/bribery in the firm’s business environment. Adopting a triple difference design, we show that affected firms operating in countries perceived as more corrupt, where bribery may be necessary to get contracts, pay higher audit fees after the law enforcement. Moreover, we show that the increase in audit fees (i) is not the result of changes in the financial reporting quality of these firms; and (ii) is not due to higher compliance costs for companies that have a larger number of subsidiaries in corrupt countries. The results are consistent with understanding this increase in audit fees mainly as a form of compensation for the higher perceived litigation and reputation costs for the auditors, rather than as an additional price paid for significant increases in the compliance and monitoring costs. Moreover, subject firms that operate in countries with low corruption indexes and low bribery risk experience no change in audit fees.