Stuck in traffic: Do auditors price traffic congestion?

Abstract

Although the detrimental impact of traffic congestion on firm operations and human health is widely acknowledged, it is unclear whether auditors perceive traffic congestion as a risk factor. We posit and find that the traffic congestion levels in audit clients' domicile cities are positively associated with audit fees. Using a structured equation model, we identify and illustrate several channels that explain the effect of traffic congestion on audit fees. We also find evidence of audit fee increases after events that expose clients to higher levels of traffic congestion. Finally, the effect of traffic congestion on audit fees is more pronounced when clients have higher operation concentration near their headquarters or when auditors' offices are located near clients’ headquarters. Collectively, our findings suggest that auditors view traffic congestion as a risk factor that is priced into audit fees.