Politically Connected Boards and Audit Pricing: U.S. Evidence Abstract This study examines how clients’ personal tie-based political connections influence auditors’ assessments of audit risk as reflected in audit fees by using a comprehensive data set of 29,785 firm–year observations that are hand-collected from all U.S. Securities and Exchange Commission listed firm filings from 2001 to 2009. We find that auditors charge higher fees to politically connected firms than to non-connected ones. We also find that this incremental effect of a firm’s political connections on audit fees is more pronounced among firms with weaker corporate governance and more complicated operational structures. Furthermore, this relation has become more pervasive since the Sarbanes–Oxley Act. These findings suggest that auditors perceive politically connected firms as riskier. Accordingly, they exercise greater effort and charge higher fees to these connected firms. Our evidence is robust to a battery of econometric endogeneity remedies and to exogenous events such as presidential and mid-term elections and the intense financial crisis of 2008–2009. Our finding of higher audit fees being charged to connected firms is also robust in the presence of other forms of political influence, including campaign contributions and lobbying expenditures. Introduction This study examines how clients’ political connections influence auditors’ assessments of audit risk as reflected in audit fees in the United States. Extant studies find that corporate political connections influence the financial reporting practices of connected firms. ] find that U.S. firms’ lobbying activities slow down the regulatory detection of accounting fraud committed by connected firms, which enables their managers to manipulate earnings for longer periods compared to non-lobbying firms. ] also provide evidence that U.S. firms with connections through political contributions were more likely to manage earnings during the 2004 elections. These findings suggest
Politically Connected Boards and Audit Pricing: U.S. Evidence Abstract This study examines how clients’ personal tie-based political connections influence auditors’ assessments of audit risk as reflected in audit fees by using a comprehensive data set of 29,785 firm–year observations that are hand-collected from all U.S. Securities and Exchange Commission listed firm filings from 2001 to 2009. We find that auditors charge higher fees to politically connected firms than to non-connected ones. We also find that this incremental effect of a firm’s political connections on audit fees is more pronounced among firms with weaker corporate governance and more complicated operational structures. Furthermore, this relation has become more pervasive since the Sarbanes–Oxley Act. These findings suggest that auditors perceive politically connected firms as riskier. Accordingly, they exercise greater effort and charge higher fees to these connected firms. Our evidence is robust to a battery of econometric endogeneity remedies and to exogenous events such as presidential and mid-term elections and the intense financial crisis of 2008–2009. Our finding of higher audit fees being charged to connected firms is also robust in the presence of other forms of political influence, including campaign contributions and lobbying expenditures. Introduction This study examines how clients’ political connections influence auditors’ assessments of audit risk as reflected in audit fees in the United States. Extant studies find that corporate political connections influence the financial reporting practices of connected firms. ] find that U.S. firms’ lobbying activities slow down the regulatory detection of accounting fraud committed by connected firms, which enables their managers to manipulate earnings for longer periods compared to non-lobbying firms. ] also provide evidence that U.S. firms with connections through political contributions were more likely to manage earnings during the 2004 elections. These findings suggest