Audit in uncertain times: geopolitical risk and audit outcomes

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Abstract
Purpose: Geopolitical risk (GPR) has skyrocketed globally and become a key concern for policymakers, regulatory authorities and corporate strategists. Trade wars, political tensions, regional conflicts and terrorist attacks are key components of GPR, which can significantly elevate a firm’s audit risk. Given this backdrop, we investigate the relationship between firm-level GPR and audit outcomes in the US. Design/methodology/approach: Our data consists of 20,517 firm-year observations collected for the period 2000–2021. The data are analysed applying firm-fixed effects that address endogeneity by controlling for unobserved, time-invariant characteristics specific to each firm. We further employ two identification tests, Lewbel’s (2012) method and propensity score matching, to address potential endogeneity concerns and conduct several sensitivity analyses to ensure the robustness of our findings. Findings: Our analysis reveals an unfavourable impact of GPR on audit outcomes, indicating that firms with high GPR tend to incur higher audit fees, experience longer audit delays, face more financial restatements, are more likely to receive going-concern opinions and experience greater internal control issues. We further show that such unfavourable impacts are more pronounced for clients that experience high information asymmetry, are located far from the auditors, exhibit weak governance oversight and lack industry-specific audit specialists. Likewise, our additional tests reveal that the adverse impacts of GPR on audit outcomes are more prevalent in firms with lower gender diversity, fewer financially expert directors and firms that experience higher economic policy uncertainty (EPU). Finally, we find that firms with greater GPR face a higher likelihood of lawsuits. Practical implications: Our findings have important policy implications. For example, regulators could encourage disclosures on GPR to enhance transparency for auditors, investors and other stakeholders. They might also promote stronger corporate governance, improved information environments and greater audit committee expertise and diversity, especially in high-risk geopolitical contexts. Additionally, directors and auditors should collaborate to address geopolitical threats by strengthening internal risk management systems and reducing information asymmetry. Originality/value: To our knowledge, no prior study examines the impact of firms’ GPR on audit outcomes. Our study is the first to comprehensively analyse the heterogeneous influence of GPR on important audit outcomes such as audit fees, audit report delays, financial restatements, going concern opinions and internal control. Hence, our study addresses a critical gap in the literature.

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