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Political Corruption and Auditor Behavior: Evidence from US Firms

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  • Hongkang Xu
  • Mai Dao
  • Alex Petkevich

Abstract

This paper investigates the impact of political corruption on auditor behavior in the United States. We find that US firms headquartered in more corrupt regions pay higher audit fees, have longer audit report lags, and are more likely to receive a going concern audit opinion. Political corruption is a manifestation of a weak institutional environment and, as such, weakens the rule of law. In addition, political corruption erodes the public’s belief in a political system and reduces interpersonal trust. Our results suggest that auditors assess the risk and trustworthiness of their clients based on where firms are headquartered. The results are robust to using a 2SLS regression analysis and a propensity-score-matched sample. This study extends the prior research on political corruption and the client risk management strategies used by external auditors. Moreover, the current study will be helpful to regulators considering the more explicit role of external auditors in corruption risk assessment.

Suggested Citation

  • Hongkang Xu & Mai Dao & Alex Petkevich, 2019. "Political Corruption and Auditor Behavior: Evidence from US Firms," European Accounting Review, Taylor & Francis Journals, vol. 28(3), pages 513-540, May.
    • Handle: RePEc:taf:euract:v:28:y:2019:i:3:p:513-540
    DOI: 10.1080/09638180.2018.1499547
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    Cited by:

    1. Chen, Xia & Jiang, Xuejun & Lu, Louise Yi & Yu, Yangxin, 2021. "Local political corruption and Firm's non-GAAP reporting," Journal of Corporate Finance, Elsevier, vol. 70(C).
    2. Ahsan Habib & Mabel D' Costa & Ahmed Khamis Al‐Hadi, 2023. "Consequences of local social norms: A review of the literature in accounting, finance, and corporate governance," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(1), pages 3-45, March.
    3. El Ghoul, Sadok & Guedhami, Omrane & Wei, Zuobao & Zhu, Yicheng, 2023. "Does public corruption affect analyst forecast quality?," Journal of Banking & Finance, Elsevier, vol. 154(C).
    4. Ayad Ahmed Mohammed Al-Qublani & Hasnah Kamardin & Rohami Shafie, 2020. "Audit Committee Chair Attributes and Audit Report Lag in an Emerging Market," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(4), pages 475-492, July.
    5. Costa, Mabel D. & Habib, Ahsan, 2023. "Local creative culture and audit fees," The British Accounting Review, Elsevier, vol. 55(2).
    6. Frederick Kibon Changwony & Anthony Kwabena Kyiu, 2024. "Business strategies and corruption in small‐ and medium‐sized enterprises: The impact of business group affiliation, external auditing, and international standards certification," Business Strategy and the Environment, Wiley Blackwell, vol. 33(1), pages 95-121, January.

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