Audit fees and corruption: An international analysis of audit rates and audit hours

We expect that country risk affects a country’s audit risk. Hence, audit price in a country, represented by average hourly audit fee, should be positively associated with country-specific audit risk. We identify a small sample of companies listed on the Tel Aviv Stock Exchange (Israel) that use auditors in different countries. As these companies must disclose total audit fees and hours of engagement, we compiled a novel dataset that includes both fees and hours in 25 different countries for 10 years in order to compute the average hourly audit fee per country. We use the Corruption Perception Index (CPI), published annually by Transparency International, as the primary measure of country risk for each country. We expect and find a positive association between perceived corruption and average hourly audit fee normalized by a country’s per-capita Gross Domestic Product. We use several alternative measures of country risk with similar results. However, we find no association between audit hours and any country-specific risk measures, including corruption. Our results are consistent with the argument that auditors in more corrupt countries charge higher hourly audit rate for their services, but we do not find simultaneously an increase in audit effort in terms of total hours.