The impact of economic sanctions on audit pricing

Abstract

This study extends the literature on the association between business risk and audit pricing by exploring the economic sanctions of 2014 imposed by the Western community on Russia. The sanctions targeted predominantly Russian companies with state ownership, potentially leading to increased business risk for these companies. I find support for the notion that, post-2014, audit fees increased in the case of Russian state-owned companies. This evidence suggests that auditors passed on costs, arising from sanctions-driven increase in audit risk, to their clients. Further, the Russian government responded to sanctions by encouraging state-owned companies to terminate their audits conducted by auditing firms with foreign capital and/or foreign partnerships—Big 4 firms—meaning these firms were likely to lose their lion’s share of the Russian audit and consulting revenues. Nevertheless, I do not find evidence that Big 4 firms started to offer services at a discount to retain lucrative contracts with leading Russian companies. In contrast, the results indicate that Big 4 firms charged companies with state ownership higher fees for their audits, following the imposition of sanctions.