Bribes and Audit Fees
Job Market Paper (with María Gutiérrez-Urtiaga and Susana Gago-Rodriguez)
We examine whether bribery practices at the firm's business environment are reflected in audit fees. To test this, we exploit the passage of the UK Bribery Act (BA) of 2010, as a plausibly exogenous shock to the costs of bribery, both in terms of compliance costs and litigation/reputation risk. We hypothesize that audit risk increases after the law enforcement because (i) client business' risk increases (ii) auditors' effort increases as they have to make an independent appraisal of the anti-corruption procedures and the program. Because of that, firms expected to pay more bribes will also pay higher audit fees. Results indicate that firms affected by the act and operating in high (low) perceived corrupted environments experience an increase (no change) in audit fees after the passage of the act.
The Effect of Distance on Distracted Auditors: Evidence from Non-Accounting related Lawsuits against Audit Clients
(with James Hansen)
We exploit non-accounting related lawsuits against audit client-firms as an exogenous shock that shifts auditors’ attention towards the sued client to test how auditors allocate resources and time to their other non-sued clients and its subsequent effect on audit quality. Consistent with prior research, we posit that this causes a negative spillover effect to the non-sued clients that share the same auditor as the sued client. We argue that the spillover effect is not equal for all the other non-sued clients which creates a within audit office variation. We identify clients as being more prone to be affected by the distraction event if the client is in a different city than the audit office city. Adopting this identification strategy, we show that client firms whose offices are situated in a different city as compared to the auditor’s offices, experience more restatements and less identified internal control weaknesses when the auditor is distracted as compared to the client firms that have their offices in the same city as the auditor’s offices and to the time that the auditor is not distracted. Results suggest that the audit quality of the clients is directly related to the level of distraction of an audit office and the distance of the client’s office from the audit office due to a resource allocation problem. Our results have important implications for auditors in managing their portfolio of clients during times of distraction and for companies in choosing the appropriate auditor.
Auditing on the Edge: Spillover Effects of Having a Scrutinized Client
(with Mert Erinc)
We investigate whether audit-clients that are under negative media exposure can cause negative spillover effects to other clients that share the same auditor as them. Using a sample of fraud-related events in the US between 2005-2020, we examine variations in the audit quality of the affected audit offices, i.e audit offices that have a client exposed to negative media coverage. We find that, if the accusation date of the exposed client falls within the fiscal year-end and the issuance of audit opinion of another client who shares the same auditor, then this client faces a drop in his audit quality in comparison to the other clients that belong to the same portfolio. Moreover; we show that the results are not more pronounced if the media accused clients trigger an SEC enforcement action (3.7\% of the accused clients receive an SEC enforcement action), indicating that the results are not driven by the existence of fraud but rather by the media visibility. Results hold under a number of robustness checks.
Audit Office's Benefits of Auditing a Reputable Client
This study examines how an unexpected increase in client's reputation alters the audit-client relationship. We use the inclusion to the America's 100 Most Admired Companies' List as a proxy that captures firm's reputation and prestige. We believe that audit offices responsible for delivering the audits of these highly reputable firms should face a positive reputation shock. We find that these audit offices attract more clients and enjoy higher bargaining power evident by the higher audit fees to their other clientele. Further, clients of these audit offices experience positive spill over effects of better quality of audits. Results remain robust to a number of robustness checks.
The Interactive Effect of the Dark Triad Personality, Rotation risk, and Reputation risk on Auditor’s Honesty
(with Susana Gago-Rodriguez)
We examine the effects of rotation and reputation risk on auditor's honesty after taking into account the personality traits of each individual. In a laboratory experiment, we ask participants to impersonate the role of an auditor and report their audit opinion in a setting in which a client is involved in an earnings misstatement. Our results show that participants with high dark triad traits (psychology, Machiavellianism and Narcissism) issue a more honest audit opinion relative to the other low dark triad (LDT thereafter) participants when the perceived risk of rotation is high. However, there are no significant differences in personalities’ response to different reputational risks.