The Effects of Generalized Trust and Civic Cooperation on the Big N Presence and Audit Fees Across the Globe

We examine the impact of informal cultural attributes, such as generalized trust and civic cooperation in a society, on the presence of Big N auditors and audit fees in country-specific audit markets. On one hand, because societies with higher trust and civic cooperation are associated with low levels of agency problems, we could expect reduced demand and pricing of audit services when trust and civic cooperation is high. On the other hand, high trust societies may experience high societal costs of inappropriate behavior and place high value on a strong audit function which could result in a relatively high demand for audit services. In additional tests, we control for the strength of the protection of minority shareholders and its interaction with societal trust/civic cooperation. We find that both trust and civic cooperation are positively associated with Big N presence and audit fees in countries with weak investor protection. However, in countries with strong investor protection, trust is negatively associated with Big N presence and audit fees. These results suggest that both formal and informal institutions can act as substitutes in determining the demand and supply for audit services in international context