Direct and mediated association between workplace misconduct and audit fees: evidence from path analysis
Masako Darrough, Mahmud Hossain, Santanu MitraPurpose
This study aims to explore the relationship between workplace misconduct and audit fees, examining whether corporate labor-related misbehavior influences audit pricing and identifying the underlying mechanisms of this relationship.
Design/methodology/approach
The study uses recursive and non-recursive path analyses to evaluate direct and indirect effects of workplace misconduct on audit fees. To ensure robustness and eliminate reverse causality, the research uses difference-in-differences regressions, entropy-balanced matching and non-recursive modeling.
Findings
Firms involved in workplace misconduct pay higher audit fees in the year of the incident, supporting the supply-side risk perspective where auditors charge higher fees for increased audit efforts and include litigation and reputational risk premiums in audit pricing. Path analyses reveal that misconduct impacts audit fees directly and also indirectly through litigation risk and the use of Big 4 or industry-specialist auditors. Cross-sectional tests show that unionization mitigates this relationship, while political corruption amplifies it.
Research limitations/implications
The findings suggest that workplace misconduct is a significant risk factor in audit planning. Future research could further explore the long-term persistence of these fee premiums beyond the incident year.
Practical implications
For corporations, the results highlight that labor-related misconduct (especially wage theft) creates hidden financial burdens through increased assurance costs. For auditors, this study underscores the necessity of integrating labor practices and organizational behavior into risk assessment and fee-setting models.
Originality/value
This research identifies workplace misconduct as a unique determinant of audit fees. It contributes to the literature by mapping the specific channels – such as auditor specialization and litigation risk – through which social irresponsibility elevates audit costs.