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The Impact of Religiosity on Audit Pricing

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Abstract

Prior literature has demonstrated that religiosity is associated with a reduced acceptance of unethical business practices and financial reporting irregularities. On this premise, we examine whether religiosity, conceptualized as the degree of adherence to religious norms in the geographical area where a firm’s headquarters is located, has an impact on audit firms’ pricing decisions in the US. We measure the intensity of religiosity by the number of adherents relative to the total population in a county and demonstrate that increased religious adherence operates as an institutionalized monitoring mechanism that decreases audit risk and audit costs, which is, in turn, reflected in reduced audit pricing. Additional tests suggest that the impact of religiosity on auditors’ pricing decisions is not differentiated by levels of auditor expertise but that audit fees are determined by an auditor’s relative location in a market sector and religious adherence. We conclude that religious adherence reduces the need for shareholders to bear the costs of monitoring agents, a finding which could be of importance for market participants and regulators.

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Notes

  1. We employ the term religiosity for reasons of consistency with the growing branch of literature on accounting and finance (see, for instance, Hilary and Hui 2009; Vitell 2009; Dyreng et al. 2012).

  2. This is, inter alia, due to the dominant influence of Islam in the Middle East and the expansionist tendencies of both Islam and Christianity in Africa; the continuous growth of Protestantism in Latin America; and the religious ferments in Eastern Europe and former Soviet Union states. In the US, there is a steady increase in religious denominations and churches as reported in the Religious Congregations and Membership Studies, while the role of Evangelist Christianity becomes more politically influential (Innaccone 1998; Norris and Inglehart 2004).

  3. Such attitudes have been facilitated by influential, organized religious groups which have cooperated to develop common religious doctrines and codes of conduct that offer practical guidance to those involved in business (Brammer et al. 2007; ICCR 2011).

  4. This is not to say that one has to be religious in order to have the ability and capacity to expose unaccepted business practices (i.e., that higher religious adherence increases the possibility of revealing malpractice).

  5. Including, inter alia, Quest Diagnostics Inc. and GlaxoSmithKline.

  6. Auditing standards, guidelines, and professional writings prescribe that an auditor’s engagement decision should be based upon a thorough assessment of the client which is termed “engagement risk” (Bedard et al. 2008; Danziger 1999; Ethridge et al. 2007; Kerr et al. 2007; Thomas 1992; see also SAS No. 109, AU Sect. 314: Understanding the Entity and Its Environment (http://www.aicpa.org/Research/Standards/AuditAttest/Pages/SAS.aspx., accessed 15 December 2015). An essential component of engagement risk is the client’s business risk which, inter alia, comprises an assessment of the integrity and attitudes of management, as well as an assessment of the client’s broader environment along with corporate investment risk.

  7. We define corporate headquarters based on the business address rather than the address of incorporation, both provided by Audit Analytics. We do so to avoid the Delaware effect, i.e., incorporation for tax purposes at Delaware, as suggested by prior literature (see Allen and Woodland 2010).

  8. See official site at www.thearda.com (accessed 16 December 2015).

  9. This refers mainly to Christianity but incorporates all major organized religious groups, inter alia Baha’i, Buddhism, Christianity, Hinduism, Islam, Jainism, Judaism, Sikhism, Taoism, and Zoroastrianism.

  10. Please see official site at http://www.pewforum.org/2009/12/21/how-religious-is-your-state/(accessed 16 December 2015).

  11. The US Religious Landscape Survey completed telephone interviews with a nationally-representative sample of 35,957 adults living in the US who had a home telephone. The survey was conducted by Princeton Survey Research Associates International (PSRAI). Interviews were conducted in English and Spanish by Princeton Data Source, LLC (PDS), and Schulman, Ronca and Bucuvalas, Inc. (SRBI) from May 8 to August 13, 2007. Statistical results are weighted to correct known demographic discrepancies. Interviewees belong to various religions but the principal ones are: Evangelical, Protestant, Catholic, Mormon, Orthodox, Jehovah’s Witness, Jewish, Muslim, Buddhist and Hindu.

  12. According to SEC §229.103, “major” constitutes a proceeding that, exclusive of interest and costs, exceeds 10 % of the current assets of the company and its subsidiaries on a consolidated basis, and/or a proceeding that refers to sanctions for environmental damages that exceed $100,000.

  13. We have estimated the specialization proxies based on all yearly observations derived from Audit Analytics that had the minimum information to estimate specialization proxies (i.e., audit fees, name of auditor, location). This included, on average, around 9000 observations per year.

  14. Please see official site at http://www.census.gov/acs/www/(accessed 16 December 2015).

  15. Please see official site at http://www.bls.gov/(accessed 16 December 2015).

  16. Estimated as 22 % * 2545,000 (2545,000 is the average audit fees obtained from Table 3).

  17. Our expertise proxies refer to 60 SIC-2 industries, 48 states, 335 counties, and 87 MSAs which are comparable to prior studies (Francis et al. 2005; Reichelt and Wang 2010; Fung et al. 2012).

  18. Please see official site at http://www.uschamber.com (accessed 16 December 2015).

  19. We are grateful to Arthur Allen for providing directions and data on the estimation of the 150-hour rule.

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Acknowledgments

We acknowledge helpful comments by two anonymous reviewers and the editor, Domenec Mele, Costas Caramanis, Sandra Cohen, Xiaohua Fang, Raphael Markellos, Nikos Vafeas, Pauline Weetman, and Luke Watson. We thank Arthur Allen for directions and data on the 150-hour rule. This paper has also benefited from the comments of participants at the Amsterdam Business School, Aston Business School, Norwich Business School, and the 17th Annual Financial Reporting and Business Communication Conference, Bristol.

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Authors and Affiliations

  1. School of Economics and Business Administration, International Hellenic University, 14th klm Thessaloniki-Moudania, 57101, Thessaloniki, Greece

    Stergios Leventis

  2. Department of Business Administration, Athens University of Economics and Business, 76, Patission Street, 104-34, Athens, Greece

    Emmanouil Dedoulis

  3. Durham University Business School, Mill Hill Lane, Durham, DH1 3LB, UK

    Omneya Abdelsalam

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  1. Stergios Leventis
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  2. Emmanouil Dedoulis
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  3. Omneya Abdelsalam
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Correspondence to Stergios Leventis.

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Leventis, S., Dedoulis, E. & Abdelsalam, O. The Impact of Religiosity on Audit Pricing. J Bus Ethics 148, 53–78 (2018). https://doi.org/10.1007/s10551-015-3001-x

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