What is the impact of corruption on audit fees?

ABSTRACT

This study examines the impact of country-level corruption on audit fees. Using a sample of 102,934 companies from 48 countries over the period 1998–2014, the authors find that audit fees are positively associated with higher levels of corruption. They also discovered that corruption adds a significant margin to the premium paid to Big 4 (Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young and KPMG) auditors. The study opens up a new line of research and adds significantly to the academic literature on the Big 4 audit premium.

IMPACT

The study has several important implications for academics and policy-makers. These include discussion of the factors driving corruption and the role of auditing. Knowledge of the factors driving corruption should guide policy-makers to adoption of polices that could reduce corruption. The finding that audit fees are positively associated with corruption, as well as with audit quality, points to the potential for auditing as a tool for corruption control beyond its traditional role as an assurance service.

KEYWORDS:

• Audit fees
• Big 4 auditors
• corruption

Acknowledgements

We thank Stephen Cahan, David Lont, Charl de Villiers, David Emanuel and Jonathan Shipman for their helpful comments on earlier versions of the paper. We are grateful for the comments made by the participants at the 2017 American Accounting Association conference, San Diego, USA (especially the discussant); the 2017 AFAANZ Conference, Adelaide, Australia; the 2017 Financial Markets and Corporate Governance Conference, Wellington, New Zealand; the 2017 EAA Annual Congress, Valencia, Spain; and the 2016 Asian-Pacific Conference on International Accounting Issues, Hawaii, USA. We also thank Public Money & Management’s anonymous reviewers and the Deputy Editor, Andreas Bergmann, for many constructive suggestions.

Notes

*Corruption is sometimes referred to in conjunction with fraud. However, fraud is more in the nature of direct theft without the involvement of a co-operating entity. The World Bank (2016), in the context of the use of loan proceeds, distinguishes between corrupt, fraudulent, collusive, coercive, obstructive practices and, as regards corruption and fraud, defines a corrupt practice as ‘the offering, giving, receiving or soliciting, directly or indirectly, of anything of value to influence improperly the actions of another party’, while a fraudulent practice is ‘any act or omission, including a misrepresentation, that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation’.