Politically Connected Boards and Audit Pricing: U.S. Evidence

What is it about?

We investigate the impact of political directors on the pricing of audits. We document that auditors charge higher fees to politically connected firms than to similar non-connected firms. Our findings are robust to a battery of additional analyses. The effect of political connections on audit fees is mitigated by independent monitoring. Moreover, the main effect is stronger in firms with more complicated operational structures and higher litigation risk, but weaker for distressed firms. Although our findings suggest that auditors exert greater effort at politically connected clients, we show that connected clients report significantly higher discretionary accruals, consistent with auditors' incremental effort being insufficient to fully offset the audit risk inherent in these engagements. Collectively, our study sheds light on how auditors perceive political connections and their impact on financial reporting quality.

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