Corporate Corruption Culture and Audit Pricing in the U.S.

Abstract

External auditors, through extensive contact with clients, are exposed to substantial information about them including the culture of corruption that exists within the firm. Using a novel measure of corporate corruption culture developed by Liu (2016), we analyze how auditors respond to the ex-ante fraud risk associated with clients’ corporate corruption culture and whether audit effort reduces the ex-post incidence of fraud arising from corruption culture. We find that audit fees and audit effort, as proxied by audit report lag, are greater for clients with a higher corruption culture. The results are robust to a sample that has no restatements and accounting fraud (as measured by the ex-post discovery) in our sample period. Furthermore, we show that audit effort reduces the incidence of fraud arising from corruption culture. Our findings provide insights into the effect of clients’ corruption culture on audit production and offer evidence on the value of auditing.