Politically connected boards and audit pricing: U.s. evidence

SYNOPSIS: This study investigates the impact of political connections, as measured by having directors that previously held political positions, on audit pricing. 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 and the inclusion of transaction-based measures of political connections (campaign contributions and lobbying expenditures) in the model. The effect of political connections on audit fees is mitigated by independent monitoring. Moreover, the effect is stronger in firms with complicated operational structures and higher litigation risk, but weaker for distressed firms. Although our findings suggest that auditors exert greater effort at connected clients, we show that connected clients report higher discretionary accruals, consistent with auditors’ incremental effort being insufficient to offset the audit risk inherent in these engagements. Collectively, our study illuminates how auditors perceive political connections and their impact on financial reporting quality. Data Availability: All data are publicly available from sources quoted in the text.