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Political alignment and audit pricing
Author(s) -
Truong Cameron,
Garg Mukesh,
Adrian Christofer,
Pham Anh Viet,
Shane Philip
Publication year - 2020
Publication title -
international journal of auditing
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.583
H-Index - 21
eISSN - 1099-1123
pISSN - 1090-6738
DOI - 10.1111/ijau.12189
Subject(s) - politics , audit , diversification (marketing strategy) , proxy (statistics) , accounting , presidential system , business , political risk , position (finance) , economics , finance , marketing , political science , law , machine learning , computer science
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.