Do firms pay for audit risk? Evidence on risk premiums in audit fees after direct control for audit effort

This paper documents the existence of risk premiums in actual audit fees after direct control of audit effort through audit hours in a legal environment (Finland) that can be characterised as mildly litigious. Audit fee and hour data were obtained from the internal archives of four Big Six audit firms. The results suggest that when the client is a listed company, or when the auditor's perceived business risk of the client is higher than average, the audit fee contains a risk premium. As the existence of risk premiums can be documented in the institutional setting examined in this paper, they are also likely to be found in more litigious settings.