Do auditors account for firm-level political risk?

Abstract

We examine whether firm-level political risk influences auditor behaviour. Using a text-based political risk measure, we find that firms subject to higher levels of political risk face longer audit report lags, are more likely to have going-concern opinions issued by their auditors and pay higher audit fees. However, the effect of political risk on audit outcomes becomes moderated in the presence of higher lobbying efforts. Our findings suggest that political risk and lobbying efforts to mitigate such risk both influence auditors' judgments in planning audit services. Our original findings survive in a battery of robustness checks, and the primary results do not change when we use an exogenous political shock as an alternative proxy for firm-level political risk.