Audit Pricing of Terrorism

I examine whether terrorism or the risk of future terrorism affects audit fees paid by companies around the world. In the existing audit fee literature, it is unclear how terrorism risk enters the theoretical framework for audit fees. Using both a levels analysis and a changes analysis, I find a positive association between higher levels and higher increases in terrorism risk and increased audit fees. The positive association between audit fees and terrorism risk is strengthened in environments with greater litigation risk, i.e., in which the firm has a greater probability of corporate litigation, the firm is headquartered in a country with greater investor protections, or the firm is headquartered in a country that allows shareholders greater ease in filing a shareholder lawsuit. From these results, I conclude that auditors include the country-level terrorism risk in their pricing of audit fees.