Informal Institutions and Audit Pricing: Cross-Country Evidence of National Culture and Audit Fees

SynopsisThe research problemIn this study, we examined the effect of an important informal institution, namely, national culture, on audit fees in an international context.MotivationIn recent years, extant literature has increasingly focused on country-level differences in the audit environment, as these might have a significant influence on how financial statement audits are conducted across the globe. We contribute to this stream of literature by investigating the impact of national culture on audit fees.The test hypothesesBased on the demand- and supply-side perspectives of audit fees, we hypothesized that national culture dimensions — namely, uncertainty avoidance, power distance, individualism versus collectivism, and masculinity versus femininity — affect audit fees.Target populationWe used a sample of 27,670 firm-year observations across 22 countries over the 2002–2019 period.Adopted methodologyWe used ordinary least squares (OLS) regressions as baseline technique and entropy-balanced method (EBM) and system-generalized method of moments (GMM) to address endogeneity concerns.AnalysesWe examined the impact of Hofstede’s four national culture dimensions — uncertainty avoidance, power distance, individualism versus collectivism, and masculinity versus femininity — on audit fees. We also tested the robustness of results using alternative measures of national culture, subsample analyses, and additional firm-level factors.FindingsConsistent with our hypotheses, we find that audit fees are higher (lower) in countries with higher uncertainty avoidance, individualism, and masculinity (power distance) scores. Our further analyses reveal that earnings management proxied by abnormal accruals does not impact the relationship; however, country-level creditor rights influence audit fees in high power distance and masculine cultures. We also note that national culture influences auditor choice and audit opinion. Our main findings are robust to alternate proxies and subsample analysis, as well as to address potential endogeneity concerns. Overall, our findings offer important implications for firms operating in global markets and for the audit profession.