Natural disasters and audit fees

Abstract

This paper investigates the impact of natural disasters on the pricing of audit services. Using a staggered difference-in-differences (DiD) design and a sample of 1481 firm-year observations over the period 2014–2019 in China, we find that firms headquartered in areas affected by natural disasters are charged lower fees by auditors. This fee discount is not likely to be driven by a decrease in audit efforts exerted by auditors. We document that the negative relation between natural disasters and audit fees is more pronounced among (i) client firms that are audited by top domestic audit firms, (ii) client firms that are economically and politically important to auditors, and (iii) larger and more complex client firms.