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Do auditors account for firm‐level political risk?

Do auditors account for firm‐level political risk? We examine whether firm‐level political risk influences auditor behaviour. Using a text‐based political risk measure, we find that firms subject to higher levels of political risk face longer audit report lags, are more likely to have going‐concern opinions issued by their auditors and pay higher audit fees. However, the effect of political risk on audit outcomes becomes moderated in the presence of higher lobbying efforts. Our findings suggest that political risk and lobbying efforts to mitigate such risk both influence auditors' judgments in planning audit services. Our original findings survive in a battery of robustness checks, and the primary results do not change when we use an exogenous political shock as an alternative proxy for firm‐level political risk. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Auditing Wiley

Do auditors account for firm‐level political risk?

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References (47)

Publisher
Wiley
Copyright
© 2022 John Wiley & Sons Ltd
ISSN
1090-6738
eISSN
1099-1123
DOI
10.1111/ijau.12294
Publisher site
See Article on Publisher Site

Abstract

We examine whether firm‐level political risk influences auditor behaviour. Using a text‐based political risk measure, we find that firms subject to higher levels of political risk face longer audit report lags, are more likely to have going‐concern opinions issued by their auditors and pay higher audit fees. However, the effect of political risk on audit outcomes becomes moderated in the presence of higher lobbying efforts. Our findings suggest that political risk and lobbying efforts to mitigate such risk both influence auditors' judgments in planning audit services. Our original findings survive in a battery of robustness checks, and the primary results do not change when we use an exogenous political shock as an alternative proxy for firm‐level political risk.

Journal

International Journal of AuditingWiley

Published: Oct 1, 2022

Keywords: audit fees; audit report lags; business risk; firm‐level political risk; going‐concern opinions; political connections

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