A recent study published in the Journal of Accounting and Public Policy examines an important question in auditing and international business: how does foreign exchange risk affect the pricing of audit services for multinational corporations?

The paper, titled “Foreign exchange risk and audit pricing: Evidence from U.S. multinational corporations”, is co-authored by Yuyuan Chang, Prof. Yangyang Fan from the School of Accounting and Finance (AF) at The Hong Kong Polytechnic University (PolyU), and Lixin (Nancy) Su.

For multinational corporations, foreign exchange volatility can create substantial uncertainty in cash flows and financial reporting. These risks may complicate auditors’ assessments of client business risk, reporting quality, and audit effort. The study investigates whether auditors incorporate such risks into audit fees.

The research first shows that foreign exchange risk increases cash flow uncertainty and reduces financial reporting quality. These findings support the premise that foreign exchange risk heightens audit risk. Consistent with this view, the study finds that audit fees are higher for multinational corporations with greater exposure to foreign exchange volatility.

The paper further examines when this relation becomes weaker or stronger. The effect of foreign exchange risk on audit fees is reduced when multinational corporations use financial hedging to manage foreign exchange exposure. It is also attenuated when auditors possess multinational expertise, when auditors are busier, and when multinational corporations have more diversified operations.

At the same time, the impact of foreign exchange risk on audit fees is stronger for firms facing high pressure to avoid missing earnings targets and for auditors operating in more concentrated audit markets.

Overall, the study provides novel evidence on how multinational corporations’ exposure to foreign exchange risk affects financial reporting and auditing. It enriches our understanding of audit pricing by showing that auditors respond not only to firm-level complexity, but also to global financial risks that shape reporting quality and audit risk.

Keywords: Foreign exchange risk, Audit pricing, Multinational corporations, Audit risk, Financial reporting quality, Hedging, Auditor expertise, Corporate finance, Risk management

Research Paper: Chang, Y., Fan, Y., & Su, L. N. (2024). “Foreign exchange risk and audit pricing: Evidence from U.S. multinational corporations.” Journal of Accounting and Public Policy, 45, 107196.

👉 Read the full article here: https://doi.org/10.1016/j.jaccpubpol.2024.107196