The Importance of International Anti-Bribery Cooperation to Auditors’ Reaction to Foreign Corruption Risk

Abstract

Auditors are required by the Foreign Corrupt Practices Act and other rules to evaluate the probability that a firm’s management bribes foreign government officials. However, anecdotal evidence suggests that auditors do not always follow the rules. In this study, we examine the role that international anti-bribery cooperation plays in auditors’ reaction to foreign corruption risk. In difference-in-differences analyses, we find that the staggered implementation of the Organisation for Economic Co-operation and Development’s Anti-Bribery Convention significantly increases audit fees charged to U.S. multinational firms with operations in corrupt foreign countries. The audit fee increase is larger for firms with operations in corrupt countries with strong enforcement of the Anti-Bribery Convention. In cross-sectional results consistent with expectations, we find that the impact intensifies when a firm has more extensive operations in corrupt countries; its internal control system has material weaknesses; and there is no recent FCPA enforcement in the industry or foreign country where the firm operates. We also document that audit delays rise after the Anti-Bribery Convention is instituted, reflecting that auditors exert more effort afterward. Taken together, our evidence implies that stricter enforcement of the FCPA through international cooperation in anti-corruption motivates auditors to become more sensitive to their clients’ foreign corruption risk.

Keywords: Audit Fees; Foreign Corruption; Foreign Corrupt Practices Act