Audit Fees and Money Laundering
We examine the effect of money laundering on audit fees. Money laundering measures a broad category of offenses involving financial transactions with funds or monetary instruments gained through criminal activities and tax evasion. We find that firms headquartered in U.S. states with high money laundering risks pay more audit fees. Our results suggest that auditors incorporate higher risk level for clients who operate in high money laundering states and accordingly charge a fee premium. We also document that auditors charge higher audit fee for firms headquartered in high ML states as well as operate in tax haven countries. Our results are robust to controlling for a large number of firm level and county level characteristics including social capital, education, and income.