Economic Freedom and Audit Fees: Evidence From the USA

Abstract

We examine the association between US state-level economic freedom and audit fees. We argue that economic freedom lowers clients' perceived business risk, thereby requiring reduced audit effort and exposing auditors to a lower probability of litigation risk, which enables auditors to charge lower audit fees to clients headquartered in states with high economic freedom. Using a US sample, we find a negative association between economic freedom and audit fees. Our study contributes to the emerging literature on socio-economic determinants of audit fees by providing evidence that economic freedom reduces overall inherent risk, thereby reducing audit risks.