Layoffs unveiled: do layoff storms drive up audit fees?

Purpose - Labor-related risks resulting from layoffs may pique auditors’ scrutiny. Although previous research has enriched the understanding of the economic consequences of layoffs, the authors know relatively little about the relationship between layoffs and audit fees. This study aims to investigate whether auditors are concerned about corporate layoff events and their pricing decisions under the influence of the events. Design/methodology/approach - This study examines the effect of layoff storms on audit fees using news reports from mainstream financial and economic media in China about layoffs in listed companies. Based on whether the company is reported to have layoffs by the media in a fiscal year, this study collects data on 204 layoff storms in A-share listed companies from 2008 to 2022. Then, this study uses propensity score matching to reduce the interference of basic company characteristics. Findings - This study finds that audit fees are higher after firms experience layoff storms. Higher internal control quality and pay advantage in the industry weaken the positive relationship between layoff storms and audit fees, while higher political uncertainty strengthens this positive relationship. Further tests show that companies with proactive layoffs, persistent layoffs and media disclosures of layoff numbers face more audit fees, but the type of corporate response to the layoff does not influence audit pricing. Originality/value - This study contributes to the literature on audit pricing and the economic consequences of layoffs by emphasizing the impact of labor-related risks on audit fees.