Clients’ “Soft” Political Contributions and Auditor Pricing—Evidence from a Natural Experiment on Campaign Finance Regulation

• In Event: Break with Research and Education Poster Forum

Abstract

We utilize a natural experiment on campaign finance regulation to examine the causal relation between corporate “soft” political contributions and audit fees. Corporate soft money donation was used to circumvent the restrictions on the fundraising of federal candidates. The loophole in the campaign finance law coupled with corporate frauds in the early 2000s eventually led to the passage of Bipartisan Campaign Reform Act (BCRA) in 2002, aka the McCain-Feingold Act, which banned corporate soft money contributions. Our results indicate that auditors priced client’s risks associated with political contributions and that the price premium attenuated once firms’ ability to make “soft” political contributions was restricted. Based on additional analysis, these results cannot be explained by changes in corporate lobbying activities, accrual quality or the differential impact of SOX on firms.

Authors

• Shunlan Fang, Kent State University

• Benjamin Hoffman, Cleveland State University

• R. Drew Sellers, Kent State University - Kent