Employee power and audit Fees: Worldwide evidence

This paper investigates how country-level Employment Protection Legislation (EPL) affects auditors' pricing decisions. Using a sample of 22 OECD countries over the 1996–2011 period, we find that auditors charge lower fees for firms whose employees have greater collective bargaining power as a result of country-level employee protection legislation reforms. We further explore the potential channels and find that a firm's labor power is negatively associated with its earnings management, but positively associated with the value of employee stock options plans and staff wages. In addition, we find that the negative relationship between employee power and audit fees is more profound for firms headquartered in countries with weak corporate governance (i.e., common law countries, non-EU countries, worse governmental effectiveness), and for firms in less labor-intensive industries. Our main findings are also robust to a variety of sensitivity checks.