Code of ethics quality and audit fees |
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| Institution: | 1. School of Accountancy, Old Dominion University, Norfolk, VA 23529, USA;2. School of Accountancy - Brownsville Campus, The University of Texas at Rio Grande Valley, Brownsville, TX 78520, USA;3. School of Accountancy, California State University at Fullerton, Fullerton, CA 92831, USA;1. Memorial University of Newfoundland, Canada;2. Stony Brook University, USA;1. Emeritus Professor, The University of Akron, United States;2. Department of Accounting & Finance, Coggin College of Business, University of North Florida, United States;1. University of Chicago, United States;2. University of New Mexico, United States;3. University of Melbourne, Australia |
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| Abstract: | Using a sample of U.S. firms from 2003 to 2018, we examine the effect of an audit client’s code of ethics quality on audit fees. We find that clients with a lower code of ethics quality pay significantly higher audit fees, suggesting that auditors perceive such clients as riskier and charge greater risk premiums. We also find that such clients have higher litigation risk and auditors spend greater effort when auditing such clients. Our study is among the first to demonstrate the role of a client’s code of ethics quality in audit pricing. Overall, our findings are consistent with codes of ethics being useful to auditors in assessing managers’ financial representations and providing value to firms. |
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| Keywords: | Code of ethics Audit risk Audit fees Audit effort M14 M42 |
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