Economic policy uncertainty and audit effort: evidence from audit hours

Abstract

PurposeThis paper aims to examine the association between economic policy uncertainty (EPU) and audit effort by focusing on audit hours. This paper also explores whether significant political uncertainty might amplify the positive association between EPU and audit effort by focusing on Korea.Design/methodology/approachThis study uses 21,543 Korean firm-year observations from 2005 to 2018 in an audit hour determinant model, as well as EPU following Baker et al. (2016) and audit hour to proxy audit effort.FindingsEPU is positively associated with audit hours, indicating that auditors work more audit hours in response to firms’ high EPU resulting from higher earnings manipulation risk. Further, whether this positive association between EPU and audit effort might be altered by significant political uncertainty is investigated using a presidential election dummy. The empirical results show that auditors work additional audit hours during fiscal years in which presidential elections occur, given high EPU.Originality/valueTo the best of the authors’ knowledge, this paper might be the first empirical attempt to use audit hour data with EPU to provide practical implications to academia or auditors.