The price of dishonesty: how the disclosure of defaulters impacts audit fees in China

Despite the importance of integrity and the social cost of being dishonest, limited evidence exists regarding the economic consequences of dishonesty. Our study illuminates this issue by investigating how dishonesty affects audit fees. The results indicate that dishonest firms are charged with higher audit fees. We identify possible mechanisms through which dishonesty affects audit fees, i.e. increased operational risk and higher public pressure. Further, dishonesty would result in more modified audit opinions and frequent auditor switches. The negative consequences of dishonesty revealed in this paper indicate that auditors consider their clients’ dishonesty a source of risk and that they exert greater effort in response.