Political alignment and audit pricing

Cameron Truong, Mukesh Garg, Christofer Adrian, Anh Viet Pham, Philip Shane

Research output: Contribution to journalArticleResearchpeer-review

1 Citation (Scopus)

Abstract

This article investigates the impact of political alignment on the pricing of audit service for U.S. firms. While prior studies have mainly focused on the political connectedness stemming from firms' active political effort, our study is different as we exploit changes in the U.S. political landscape, which are exogenous to firms. We employ a political alignment index (PAI) of each state's leading politicians with the presidential party to proxy for U.S. domestic firms' political alignment. We build upon the policy risk theory, and conjecture that auditors take into account the risk emanating from firms' political geography position and price this risk in their audit service fees. Our empirical results show a positive association between PAI and audit fees. Collectively, our findings suggest that auditors perceive firms whose headquarters are located in more politically aligned states to be riskier, while corporate diversification and managerial ability act as effective mitigating factors.

Original languageEnglish
Pages (from-to)205-231
Number of pages27
JournalInternational Journal of Auditing
Volume24
Issue number2
DOIs
Publication statusPublished - Jul 2020

Keywords

  • Audit Pricing
  • Diversification
  • Managerial Ability
  • Political Alignment

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