Ilitch School finance faculty accepted in accounting journal
Mike Ilitch School of Business Associate Professors of Finance Manoj Kulchania and Anand Jha had a recent article accepted in The Accounting Review. In its 92nd year of publication, the premier journal publishes articles reporting the results of accounting research and explaining and illustrating related research methodology. The article, “U.S. Political Corruption and Audit Fees,” discusses the characteristics and correlation between higher fees and corrupt districts based on data from the corruption convictions from the U.S. Department of Justice.
Kulchania and Jha co-authored the article with Jared Smith.
Using data on corruption convictions from the U.S. Department of Justice, we find that auditors charge higher fees when a firm is headquartered in a more corrupt district. This result is robust to a wide range of time and location fixed effects, using capital city isolation as an instrument, and propensity score matching. We also find that, relative to those in non-corrupt districts, firms in corrupt districts are more likely to have weak internal controls and to restate earnings and that their auditors exert greater effort. This evidence suggests that auditing firms in corrupt areas entails additional risk, which auditors price into fees.