Bribes and Audit Fees

We exploit the UK Bribery Act 2010 to test whether the pricing of audit services changes with the risk of the client-firm engaging in bribery. Adopting a triple-difference design, we show that subject firms operating in countries perceived as more corrupt, where bribery may be necessary to get contracts, pay higher audit fees following the law enforcement. Moreover, we show that the increase in audit fees is neither due to higher compliance costs nor due to a change in the financial reporting quality. The results indicate that the increase in audit fees after the passage of the UK BA for subject firms operating in high corruption environments is a compensation for the higher potential litigation and reputation costs for the auditors working with these client firms.