Responsiveness of Audit Fees to Audit Risk and Audit Quality During COVID-19: European Evidence

By leveraging the COVID-19 pandemic as an exogenous shock, this study examines the evolution of audit fees, audit fee responses to audit risk, and audit quality during pandemic-induced remote audits in Europe. With archival audit data from audit analytics and firm-level financial variables drawn from the Factset Fundamentals database, spanning 2018–2021, the author applies univariate tests and panel regression to test the hypotheses; the multimethod tests reveal that Covid-19 induced remote audits and audit delays, as a result of the extensive lockdowns and restrictions on human movement, increased audit fees significantly. Furthermore, during the pandemic, auditors reacted strongly to audit risks, in the form of previous year financial restatements, by increasing audit fees. Despite the devastating effects of the pandemic on human lives and economies, it did not adversely affect audit quality, as indicated by the lower issuance of restatements in the pandemic period compared with the non-pandemic period. Therefore, the higher audit fees charged during the Covid-19 crisis period appear associated with increased audit quality, possibly because auditors became more conscious of the altered work environment. This finding corroborates evidence of a positive relationship between audit fees and audit quality. The findings also offer an initial empirical examination of the evolution of audit fees and audit quality during Covid-19. This article expands the relatively scarce research that addresses the European context. Finally, it complements literature on auditors' pricing mechanisms, by detailing how systemic risk factors such as uncertainties due to a global health crisis and transitions to remote audits can affect auditors' pricing decisions.