Anti-Corruption Intensity and Auditors’ Propensity for Incorruption

We examine whether anti-corruption intensity affects auditors’ propensity for incorruption, i.e., the relationship between audit fees and financial reporting quality. Using hand-collected anti-corruption data and audit-related data for a sample of 16,677 firm-year observations from 2012 to 2018 and controlling for the anti-corruption intensity in the audit clients’ city, we find that anti-corruption intensity in the auditors’ city increases the auditors’ propensity for incorruption. In addition, we find that the effect of anti-corruption intensity on auditors’ propensity for incorruption is mainly related to the review auditor and not the engagement auditor, suggesting that the review auditor is more concerned about corruption risk than the engagement auditor. We find that the fear effect and auditor sanctions are two mechanisms through which anti-corruption intensity affects auditors’ propensity for incorruption. Overall, the results indicate that anti-corruption intensity in auditors’ location can affect auditors’ work, making them more prudent and diligent