Corporate Political Activism and Audit Fees: Evidence from Initial Public Offerings

Gounopoulos, Dimitrios; Loukopoulos, Georgios and Loukopoulos, Panagiotis (2019). Corporate Political Activism and Audit Fees: Evidence from Initial Public Offerings. In: 42nd Annual Congress of the European Accounting Association, 29-31 May 2019, Paphos, Cyprus.

Abstract

Although active political strategies may lead to lucrative benefits, they are often associated with non-transparent diverting practices. Using a hand-collected data set of politically connected U.S. IPOs, we investigate how auditors respond to corporate political activism. We find that auditors charge higher audit fees to politically connected firms than to non-connected ones, suggesting that agency costs dominate the strategic benefits of political affiliations. This relationship is especially pronounced among firms for which are risky, operationally complex, or with reputable audit committees. In addition, we reveal that auditors consider political ideology as a useful proxy for managements’ philosophy and operating style when assessing their clients’ audit risk. Taken together, our evidence indicates that auditors incorporate the interplay between politics and corporations into the pricing of their auditing services.

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