Do auditors care about firm-level political risk?

Abstract

We study auditors’ client risk management with regard to firm-level political risk. While prior research relies mainly on economy-wide proxies for political risk (such as the economic policy uncertainty index), Hassan, Hollander, van Lent, and Tahoun (2019) suggest that a substantial part of political risk plays out at the firm level. Using a new measure of firm-level political risk, we find that higher political-risk firms are charged with higher audit fees and associated with longer audit report delay. Higher political-risk firms are also more likely to receive going concern opinions. However, we do not find that auditors are more likely to resign from higher political-risk firms. We contribute to the auditing literature by studying previously unexamined firm-level political risk and demonstrating that it affects auditor decisions. Our findings have significant implications for accounting firms, regulators, and managers and directors (especially audit committee members) of public companies.