Macroeconomic uncertainty and audit pricing

This paper examines the association between macroeconomic uncertainty and audit fees. Using the volatility index from the Chicago Board Option Exchange to proxy for macroeconomic uncertainty and a sample of US firms from 2002 to 2014, we document that macroeconomic uncertainty is negatively associated with audit fees and that the fee reduction during periods of high uncertainty is more pronounced for firms appointing Big 4 and specialist auditors and for firms with better financial condition. The results are consistent with the notions that market-wide uncertainties give firms a greater advantage over auditors during the price negotiation process and that the effect of macroeconomic uncertainty on audit fees varies across auditor and client attributes. The results are robust to an alternative sample in which we exclude firm-year observations during the 2008–2009 financial crisis and to an alternative measure of macroeconomic uncertainty. Our findings also suggest that uncertainty at the macro level provides incremental explanatory power over GDP growth, i.e., business cycles. Overall, this paper provides evidence that the macroeconomic environment plays a role in determining audit fees.