Does corporate culture impact audit pricing? Evidence from textual analysis

Abstract

AbstractThis study examines whether auditors incorporate their clients’ corporate culture into audit pricing. We construct a measure of corporate collaboration culture using textual analysis of public firms’ 10‐K reports. We find that firms with more collaboration culture pay lower audit fees. We argue that firms with a culture of collaboration emphasize harmony among people, leading to lower litigation risk, which lowers auditor risk premiums. Collaboration culture also encourages employees’ reporting of errors and problems, leading to lower control risk, which lowers audit risk premiums. Using path analysis and a structural equation model, our findings support the argument. Moreover, we do not find evidence supporting alternative explanations of reduced audit quality and significant auditor changes. The negative relation between collaboration culture and audit fees is robust to multiple alternative measures of collaboration culture, but we caution about the interpretation of the economic significance of our finding.