Climate Risk and the Price of Audit Services: The Case of Drought

What is it about?

This paper shows that drought conditions result in increased audit fees. First, we provide empirical evidence that drought conditions, as an external risk factor that is seemingly unrelated to the client and the audit pricing process, is an important determinant of audit fees. Second, our study increases public awareness of climate related risks and identify an unexplored factor that contributes to economic cost. Third, we improve firms' understanding of climate related risks by quantifying climate costs and also recommend a potential mitigation strategy in attenuating these risks. Finally, our study provides insights on a new risk factor that auditors need to explicitly consider in managing their client portfolios.

Featured Image