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1. Introduction
The COVID-19 pandemic has posed unprecedented level of uncertainty about the status of future economy, business practices and corporate earnings that represent the important elements of financial reporting, creating many challenges for both managers and independent auditors. The pandemic has forced businesses and auditors to operate remotely [1]. While accounting firms, especially the Big 4, have embraced new ways of conducting audits with the emergence of new technology and artificial intelligence, the pandemic has significantly accelerated the transition toward more virtual audit processes (Kalia, 2020; Kostem, 2021).
The effectiveness of virtual audit processes depends on not only auditors’ readiness to perform such audits but also clients’ internal controls and technology capabilities. Due to COVID-19 lockdowns, some controls might not be in place, a segregation of duties might not be performed and employees might be less engaged and noncompliant with existing internal controls following a work-from-home order, increasing the risk of fraudulent activities (Kalia, 2020; Murphy, 2020). The technology capabilities of clients to collect, process and store data can be a significant challenge for auditors as a remote access to clients’ data in digital format has become an essential part of the audit process (Kalia, 2020; Illuzzi et al., 2020). Furthermore, as their clients struggle with continued economic challenges of the pandemic, auditors encounter significant challenges in forecasting their clients’ future performance when making going-concern assessment (Illuzzi et al., 2020). Auditors’ challenges to conduct remote audit processes, along with technological challenges, the weakening of clients’ internal control and the increasing risk of fraudulent activities due to the COVID-19 lockdown, are likely to affect audit fees and the timeliness of audit report.
The current study aims to examine the impact of the COVID-19 public health restrictions on audit fees and audit delay at the auditor local office level. First, we examine whether COVID-19 lockdowns have an impact on audit fees and audit delay. To measure the degree of the pandemic restrictions, we use the length of the lockdown or stay-at-home order (in days) during the first wave of the COVID-19 outbreak in the state of the auditor office location. Simunic (1980) introduces the commonly accepted model of audit pricing that defines audit fees as the product of hourly billing rate and audit labor...