Corporate compliance programs and audit pricing – a quasi-natural experiment in China

Purpose: This study aims to investigate whether and how auditors price corporate compliance programs. Design/methodology/approach: Using a unique experiment of the implementation of corporate compliance programs in China’s state-owned enterprises (SOEs), the authors conduct a staggered difference-in-differences (DID) research design. Findings: The authors find that audit pricing of pilot SOEs declines after the implementation of corporate compliance programs. Mechanism tests reveal that corporate compliance programs significantly reduce regulatory scrutiny and corporate misconduct, while improving the quality of internal controls. This, in turn, supports auditors’ perception of a reduced audit risk. Moreover, the effect of corporate compliance programs on audit pricing is more pronounced in firms with higher compliance risk and those audited by the Big 4 auditors. The additional analyses show that after the implementation of corporate compliance programs, auditors are more likely to issue clean audit opinions and reduce audit delays. Originality/value: This study fills a gap in the literature by examining the unintended spillover effects of corporate compliance programs on auditors’ behaviors and decisions. This research also adds to the ongoing discussion about the trade-offs between the costs and benefits of corporate compliance.