Bribes and audit fees

Abstract

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We examine how the UK Bribery Act 2010—a law aimed at discouraging corruption—affected auditors’ fees and perceived risks associated with client firms engaging in bribery. Adopting a triple-difference design, we find that those client firms subject to the act and operating in countries perceived as more corrupt pay higher audit fees following the enactment of the act, are more likely to change auditors, and are less likely to be audited by one of the Big 4 auditors. However, we observe no significant changes for subject client firms that operate in low-corruption environments. Moreover, the act has no impact on financial reporting quality across clients. Therefore, we conclude that the increase in audit fees after the passage of the act for client firms operating in high-corruption environments is the response of auditors to the higher potential litigation and reputation costs they face when engaging with clients who are more likely to engage in bribery.