Impact of Religiosity on Auditors' Behavior and Audit Fees
55 Pages Posted: 29 Sep 2017
Date Written: September 27, 2017
Extending the existing literature on the impact of religiosity on human behavior, we argue that religiosity also has a significant impact on auditors’ risk and trust behavior, which is reflected in lower audit fees. Higher religiosity values are expected to motivate auditors to provide higher reliability to information and they would achieve this by reducing audit risk and audit effort. Auditors operating in high religiosity areas are expected to readjust their client portfolio in a way that their overall risk exposure is lower. Additionally, high religiosity would enhance mutual trust among auditors and managers which will encourage auditors to recognize higher reliability of information prepared by managers operating in high religiosity areas. The higher reliability of information generated by managers will in turn result in lower audit risk and lower audit effort. The joint effect of lower risk and lower audit effort will translate into lower audit fees for auditors operating in high religiosity areas, especially when the client firms are also located in high religiosity areas. The results confirm that overall firm risk as well as audit fees are lower for the client firms of auditors operating in high religiosity areas compared to the client firms of auditors operating in lower religiosity areas. The findings also show that the negative association is stronger when auditors are located in rural high religiosity areas and also when the client firms have comparatively lower complexity, reflected by a lower number of firm segments, because lower complexity reduces audit risk and audit effort.
Keywords: Religiosity, Audit Fees, Rural Areas Religiosity, Urban Areas Religiosity, Audit Risk
JEL Classification: Z12, M41, M42
Suggested Citation: Suggested Citation