2022- Working Papers: Finance, Accounting and Insurance

Companies listed on the Tel Aviv Stock Exchange (Israel) must disclose total audit fees and hours of engagement. We identify a sample of Israeli companies that have multinational operations and that use auditors in different countries. Using these disclosures, we compile a dataset that includes both fees and hours in 21 different countries. We compute the average hourly audit fee per country and use it as a country-specific measure of audit value. We argue that this measure of value increases with audit risk, as auditors should be compensated for auditing riskier entities. As a measure of audit risk, we use the perceived corruption index published by Transparency International for each country. Hourly audit fee is an income measure, and it is correlated with average salary in a country; audit fees are higher in richer countries. Hence, we also compute a standardized hourly audit rate as the hourly rate divided by per-capita GDP in the country and examine the association between perceived corruption and standardized hourly rate. When using standardized hourly rate and controlling for country and year fixed effects in our empirical estimation, we find a positive association between standardized hourly audit fees and corruption levels. This result suggests that auditors in more corrupt countries are compensated for audit risk by charging a higher hourly audit rate for their services. An alternative explanation is that auditors are less ethical and engage more in rent extractions from clients.