Monitoring the Monitors : Auditors, Corporate Theft, and Corruption

Using a unique database of banking transactions, I examine the relationship between auditing and income diversion in a sample of 25,824 companies. In contrast to other studies, my methodology enables me to accurately measure corporate theft and observe the fees charged by auditors, which are not available to the public. I find that Big 4 auditors receive higher audit and non-audit fees when their clients transfer more money to fraudulent entities. A 1 standard deviation increase in income diversion corresponds to a 9.2% increase in audit fees and a 24.8% increase in other fees. I find that this relationship is partially explained by the auditors' propensity to corrupt (the measure of corruptness developed by Mironov, 2015). In addition, I find that Big 4 employees with a high propensity to corrupt receive much higher annual salary increases than their less corrupt colleagues. A 1 standard deviation in PTC corresponds to a 5.2%-9.6% increase in annual salary. This study contributes to our understanding of the relationship between auditing and corporate theft, and it is relevant to large swathes of the (non-OECD) global economy, which prior research has not sufficiently focused on