Local Gambling Attitudes and Audit Quality: Evidence from Audit Adjustments

Abstract

This study examines the influence of local gambling attitudes on audit quality. As a preference for gambling correlates to a greater tendency to take risks, we hypothesize that auditors make a greater magnitude of audit adjustments for clients headquartered in gambling‐prone areas to reduce heightened audit risk. Consistent with our hypothesis, the empirical results show a positive relation between local gambling attitudes and the magnitude of audit adjustments. Further analyses show that this association is more pronounced when the regulatory cost is higher, and when the board chair or CEO comes from a gambling‐prone area. We also find evidence that gambling culture results in greater magnitudes of both upward and downward audit adjustments, audit firms appoint more experienced audit partners to gambling‐prone clients, and there is a fee premium for gambling‐prone clients.