Purpose Non-financial misconduct encompasses breaches of laws and standards related to occupational safety, wage and hour compliance and environmental regulations. This study aims to examine how different forms of non-financial misconduct affect audit fees. Design/methodology/approach The authors refer to the Violation Tracker data set and a sample of 10,233 US firm-year observations from 2007 to 2022. They use regression analysis to test the association between the natural logarithm of audit fees and two proxies for non-financial misconduct: the natural logarithm of penalty amount and the natural logarithm of the number of penalties. Findings The authors find that audit fees are significantly higher for firms involved in non-financial misconduct, consistent with audit risk pricing theories. Further analysis indicates that the positive association with audit fees is most pronounced for misconduct in the “other” category, which includes violations related to government contracting, health care, competition and miscellaneous issues. This finding suggests that auditors perceive these types of violations as carrying higher litigation or reputational risk. The findings of this study also indicate that CEO turnover moderates this relationship, a result that adds to the corporate governance literature by showing how changes in leadership can alter the risk profile perceived by auditors. Finally, the authors find that the fee premium following non-financial misconduct reflects greater audit effort, elevated engagement risk for both high-reputation auditors and those serving high-visibility clients and increased client demand for industry specialist auditors. Originality/value To the best of the authors’ knowledge, this study is the first to offer a nuanced perspective on how auditors evaluate and incorporate non-financial risk into their fee assessments, providing valuable insights for both researchers and practitioners.
Xu et al. (Sat,) studied this question.