Auditors' perceived business risk and audit fees: Analysis and evidence

This study analyzes the relation between auditors' perceived business risk and audit fees to determine whether audit firms or their clients bear the e xpected legal costs of business risk. We predict that hourly audit fees and the number of audit hours are increasing in business risk. Using confident ial survey data collected by a large international accounting firm for 422 audits, we find that high business risk increases the number of audit hours , but not the fee per hour. This implies that firms perceive firm-level dif ferences in business risk and obtain compensation through billing additiona l hours, not by raising the hourly charge.