The Effect of Corporate Political Risk on Audit Fees

Abstract

The objective of this study was to examine the effect of political risk on the audit fees of companies listed on the Tehran Stock Exchange. This applied study employed a descriptive-correlational research design. The statistical population consisted of companies listed on the Tehran Stock Exchange during the five fiscal years from 2020/21 to 2024/25. After applying the sampling criteria, 146 companies, representing 730 firm-year observations, were selected. Corporate political risk was measured through a content analysis of the boards of directors’ annual reports, and the research hypothesis was tested using a panel regression model. The results indicated that corporate political risk had a positive and statistically significant effect on audit fees. This finding suggests that greater political risk intensifies information uncertainty and audit risk, thereby expanding the scope of audit procedures, increasing the volume of audit testing, and requiring auditors to allocate more time and resources to audit engagements. These factors ultimately increase audit fees. The findings demonstrate that political risk is an important determinant of audit fees. When auditing companies with higher levels of political risk, auditors charge higher fees because of the increased audit risk and the need to perform more extensive audit procedures. By measuring political risk through a content analysis of boards of directors’ reports, this study provides new empirical evidence regarding the role of political risk in determining audit fees in the Iranian capital market. The findings may assist financial statement users, audit firms, and policymakers in improving risk assessments and related decision-making.