Regulatory Uncertainty and Audit Fees: Evidence from Cannabis Legalization and Financial Institutions

• In Event: Regulation and Monitoring

Abstract

Since 2014, a number of U.S. states have legalized business activities related to the production, distribution, and use of recreational cannabis. These activities remain illegal at the U.S. federal level, creating significant regulatory uncertainty for businesses located in legalizing states, particularly federally-insured banks. Employing a difference-in-differences approach using a matched sample of banks in legalizing and non-legalizing states, we document an increase in audit fees for banks located in legalizing states after cannabis legalization. This finding suggests that the conflict between state and federal cannabis laws produces regulatory uncertainty affecting audit engagement risk. In supplemental analysis, we find that the documented higher audit fees are concentrated in the subsample of state chartered banks, suggesting that audit fees increased primarily for banks that are more likely to engage in relationships with cannabis-related businesses.

Authors

• James Brushwood, Colorado State University

• Curtis Hall, Drexel University

• Eric T Rapley, Colorado State University