Local Gambling Norms and Audit Pricing

  • Jeffrey L. Callen
  • Xiaohua FangEmail author
Original Paper


This study investigates whether local gambling norms are associated with audit pricing. Using a religion-based measure of local social gambling norms, we find strong evidence that public firms located in U.S. counties with more liberal gambling norms exhibit higher levels of audit fees. This result is consistent with our view that, as an important external risk factor, clients’ local gambling norms influence audit pricing decisions. Our findings are robust to a battery of sensitivity tests, including non-religion based measures of liberal gambling norms and a natural experiment.


Gambling Social norms Audit pricing 

JEL Classification

M14 M42 Z12 



We are thankful to the editor, Steven Dellaportas, and two anonymous reviewers of this journal for their helpful and constructive comments. We also wish to thank participants at the 2016 CAAA Annual Conference and 2017 Annual Hawaii International Conference on Arts & Humanities for their remarks.

Compliance with Ethical Standards

Conflict of interest

The authors declare that they have no conflict of interest.

Ethical Approval

This article does not contain any studies with human participants or animals performed by any of the authors.


  1. Adhikari, B. K., & Agrawal, A. (2016). Religion, gambling attitudes and corporate innovation. Journal of Corporate Finance, 37, 229–248.CrossRefGoogle Scholar
  2. Advisory Committee on the Auditing Profession (ACAP). (2008). Final report of the advisory committee on the auditing profession to the U.S. Department of the Treasury. Washington, DC: ACAP.Google Scholar
  3. Akerlof, G. 1980. The theory of social custom, of which unemployment may be one consequence. The Quarterly Journal of Economics, 94, 749–775.CrossRefGoogle Scholar
  4. Alesina, A., & Ferrara, E. L. (2000). Participation in heterogeneous communities. Quarterly Journal of Economics, 115, 847–904.CrossRefGoogle Scholar
  5. Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance, 23(4), 589–609.CrossRefGoogle Scholar
  6. American Institute of Certified Public Accountants (AICPA). (1992). Audit risk alert. The CPA Letter 72.Google Scholar
  7. American Institute of Certified Public Accountants (AICPA). (2002). Consideration of fraud in a financial statement audit. In Statement on Auditing Standards No. 99. New York: AICPA.Google Scholar
  8. American Institute of Certified Public Accountants (AICPA). (2006). Audit risk and materiality in conducting an audit. In Statement on Auditing Standards No. 107. New York: AICPA.Google Scholar
  9. American Institute of Certified Public Accountants (AICPA). (2006). Understanding the entity and its environment and assessing the risks of material misstatement. In Statement on Auditing Standards No. 109. New York: AICPA.Google Scholar
  10. American Institute of Certified Public Accountants (AICPA). (2012). Understanding the entity and its environment and assessing the risks of material misstatement. In Statement on Auditing Standards No. 122. New York: AICPA.Google Scholar
  11. Arens, A. A. & Loebecke, J. L. (2000). Auditing: An integrated approach. Upper Saddle River: Prentice Hall.Google Scholar
  12. Armstrong, C., Larcker, D., Ormazabal, G., & Taylor, D. (2013). The relation between equity incentives and misreporting: The role of risk-taking incentives. Journal of Financial Economics, 109, 327–350.CrossRefGoogle Scholar
  13. Bamber, E., Bamber, L., & Schoderbek, M. (1993). Audit structure and other determinants of audit report lag: An empirical analysis. Auditing: A Journal of Practice & Theory, 12, 1–23.Google Scholar
  14. Bebchuk, L., Cohen, A., & Ferrell, A. (2009). What matters in corporate governance? Review of Financial Studies, 22, 783–827.CrossRefGoogle Scholar
  15. Bedard, J., & Johnstone, K. (2004). Earnings management risk, corporate governance risk, and auditors’ planning and pricing decision. The Accounting Review, 79, 277–304.CrossRefGoogle Scholar
  16. Bell, T. B., Landsman, W. R., & Shackelford, D. A. (2001). Auditors’ perceived business risk and audit fees: Analysis and evidence. Journal of Accounting Research, 39, 35–43.CrossRefGoogle Scholar
  17. Bertrand, M., & Mullainathan, S. (2003). Enjoying the quiet life? Corporate governance and managerial preferences. Journal of Political Economy, 111, 1043–1075.CrossRefGoogle Scholar
  18. Bushee, B. (1998). The influence of institutional investors on myopic r&d investment behavior. The Accounting Review, 73, 305–333.Google Scholar
  19. Callen, J. L., & Fang, X. (2015). Religion and stock price crash risk. Journal of Financial and Quantitative Analysis, 50(1/2), 169–185.CrossRefGoogle Scholar
  20. Callen, J. L., Fang, X., Xin, B., & Zhang, W. 2016. Knowledge advantage and stock price crash risk: Evidence from the office size of engagement auditors. Working paper.Google Scholar
  21. Callen, J. L., Morel, M., & Richardson, G. 2011. Do culture and religion mitigate earnings management? Evidence from a cross-country analysis. International Journal of Disclosure and Governance (8): 103–21.Google Scholar
  22. Causholli, M., De Martinis, M., Hay, D., & Knechel, W. R. (2010). Audit markets, fees and production: Towards an integrated view of empirical audit research. Journal of Accounting Literature, 29, 167–215.Google Scholar
  23. Chan, L. H., Chen, K. C. W., Chen, T., & Yu, Y. (2012). The effects of firm-initiated clawback provisions on earnings quality and auditor behavior. Journal of Accounting and Economics, 54, 180–196.CrossRefGoogle Scholar
  24. Chen, Y., Podolski, E. J., Rhee, S. G., & Veeraraghavan, M. (2014). Local gambling preferences and corporate innovative success. Journal of Financial and Quantitative Analysis, 49(1), 77–106.CrossRefGoogle Scholar
  25. Chenhall, R. H., & Moers, F. (2007). The issue of endogeneity within theory-based, quantitative management accounting research. European Accounting Review, 16(1), 173–195.CrossRefGoogle Scholar
  26. Christensen, D. M., Jones, K. L., & Kenchington, D. G. (2018). Gambling attitudes and financial misreporting. Contemporary Accounting Research, 35(3), 1229–1261.CrossRefGoogle Scholar
  27. Colbert, J., Luehlfing, M., & Alderman, C. (1996). Auditing—Engagement risk. CPA Journal. Retrieved Sept 25, 2018, from
  28. Coles, J., Daniel, N., & Naveen, L. (2006). Managerial incentives and risk-taking. Journal of Financial Economics, 79, 431–468.CrossRefGoogle Scholar
  29. Core, J., & Guay, W. (2002). Estimating the value of employee stock option portfolios and their sensitivities to price and volatility. Journal of Accounting Research, 40, 613–630.CrossRefGoogle Scholar
  30. Coval, J., & Moskowitz, T. (1999). Home bias at home: local equity preference in domestic portfolios. Journal of Finance, 54, 2045–2073.CrossRefGoogle Scholar
  31. DeFond, M. L., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics, 58(2–3), 275–326.CrossRefGoogle Scholar
  32. Diaz, J. (2000). Religion and gambling in sin-city: A statistical analysis of the relationship between religion and gambling patterns in Las Vegas residents. Social Science Journal, 37, 453–458.CrossRefGoogle Scholar
  33. Dyreng, S. D., Mayew, W. J., & Williams, C. D. (2012). Religious social norms and corporate financial reporting. Journal of Business Finance and Accounting, 39, 845–875.CrossRefGoogle Scholar
  34. Eadington, W. R. (1999). The economics of casino gambling. The Journal of Economic Perspectives, 13(3), 173–192.CrossRefGoogle Scholar
  35. El Ghoul, S., Guedhami, O., Ni, Y., Pittman, J. A., & Saadi, S. (2012). Does religion matter to equity pricing? Journal of Business Ethics, 111, 491–518.CrossRefGoogle Scholar
  36. Ellison, C. G., & Nybroten, K. A. (1999). Conservative Protestantism and opposition to state-sponsored lotteries: Evidence from the 1997 Texas poll. Social Science Quarterly, 80, 356–369.Google Scholar
  37. Elster, J. (1989). Social norms and economic theory. Journal of Economic Perspectives, 3(4), 99–117.CrossRefGoogle Scholar
  38. Fama, E., & MacBeth, J. (1973). Risk, return and equilibrium: Empirical tests. Journal of Political Economy, 81, 607–636.CrossRefGoogle Scholar
  39. Fang, V. W., Tian, X., & Tice, S. 2014. Does Stock Liquidity Enhance or Impede Firm Innovation? Journal of Finance (Oct): 2085–125.Google Scholar
  40. Festinger, L. A. (1957). A theory of cognitive dissonance. Stanford: Stanford University Press.Google Scholar
  41. Festre, A. (2010). Incentives and social norms: A motivation-based economic analysis of social norms. Journal of Economic Surveys, 24(3), 511–538.CrossRefGoogle Scholar
  42. Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2005). The market pricing of accruals quality. Journal of Accounting and Economics, 39(2), 295–327.CrossRefGoogle Scholar
  43. Francis, J. R. (1984). The effect of audit firm size on audit prices: A study of the Australian market. Journal of Accounting and Economics, 6, 133–151.CrossRefGoogle Scholar
  44. Francis, J. R., Michas, P. N., & Yu, M. D. (2013). Office size of big 4 auditors and client restatements. Contemporary Accounting Research, 30(4), 1626–1661.CrossRefGoogle Scholar
  45. Francis, J. R., & Yu, M. D. (2009). The effect of Big 4 office size on audit quality. The Accounting Review, 84(5), 1521–1552.CrossRefGoogle Scholar
  46. Ghosh, A., & Tang, C. Y. (2015). Assessing financial reporting quality of family firms: The auditors’ perspective. Journal of Accounting and Economics, 60(1), 95–116.CrossRefGoogle Scholar
  47. Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. Quarterly Journal of Economics, 118, 107–155.CrossRefGoogle Scholar
  48. Graham, J. R., Harvey, C. R., & Puri, M. (2013). Managerial attitudes and corporate actions. Journal of Financial Economics, 109, 103–121.CrossRefGoogle Scholar
  49. Grinblatt, M., & Keloharju, M. (2009). Sensation seeking, overconfidence, and trading activity. Journal of Finance, 64, 549–578.CrossRefGoogle Scholar
  50. Grullon, G., Kanatas, G., & Weston, J. 2010. Religion and corporate (mis)behavior. Working Paper, Rice University.Google Scholar
  51. Guiso, L., Sapienza, P., & Zingales, L. (2006). Does culture affect economic outcomes? Journal of Economic Perspectives, 20, 23–48.CrossRefGoogle Scholar
  52. Hall, B., Jaffe, A., & Trajtenberg, M. 2001. The NBER patent citations data file: Lessons, insights and methodological tools. Working Paper, University of California, Berkeley.Google Scholar
  53. Hall, B., Jaffe, A., & Trajtenberg, M. (2005). Market value and patent citations. RAND Journal of Economics, 36, 16–38.Google Scholar
  54. Hausman, J. (1978). Specification tests in econometrics. Econometrica, 46, 1251–1273.CrossRefGoogle Scholar
  55. Hay, D., Knechel, W. R., & Wong, N. (2006). Audit fees: A meta-analysis of the effect of supply and demand attributes. Contemporary Accounting Research, 23(1), 141–191.CrossRefGoogle Scholar
  56. He, J., & Tian, X. (2013). The dark side of analyst coverage: The case of innovation. Journal of Financial Economics, 109, 856–878.CrossRefGoogle Scholar
  57. Hilary, G., & Hui, K. W. (2009). Does religion matter in corporate decision making in America? Journal of Financial Economics, 93, 455–473.CrossRefGoogle Scholar
  58. Hirshleifer, D., Low, A., & Teoh, S. H. (2012). Are overconfident CEOs better innovators? Journal of Finance, 67, 1457–1498.CrossRefGoogle Scholar
  59. Hoffman, J. P. (2000). Religion and problem gambling in the U.S. Review of Religious Research, 41, 488–509.CrossRefGoogle Scholar
  60. Holmstrom, B. (1989). Agency costs and innovation. Journal of Economic Behavior and Organization, 12, 305–327.CrossRefGoogle Scholar
  61. Hong, H., Scheinkman, J. A., & Xiong, W. (2006). Asset float and speculative bubbles. Journal of Finance, 61, 1073–1117.CrossRefGoogle Scholar
  62. Houston, R., Peters, M., & Pratt, J. (1999). The audit risk model, business risk and audit planning decisions. The Accounting Review, 74(3), 281–298.CrossRefGoogle Scholar
  63. Ivkovic, Z., & Weisbenner, S. (2005). Local does as local is: Information content of the geography of individual investors’ common stock investments. Journal of Finance, 60, 267–306.CrossRefGoogle Scholar
  64. Jaggi, B., & Xin, H. (2017). Impact of religiosity on auditors’ behavior and audit fees. Journal of Accounting, Ethics, and Public Policy, 18(3), 439–493.Google Scholar
  65. Jha, A., & Chen, Y. (2015). Audit fees and social capital. The Accounting Review, 90(2), 611–639.CrossRefGoogle Scholar
  66. Johnstone, K. (2000). Client-acceptance decisions: Simultaneous effects of client business risk, audit risk, auditor business risk, and risk adaptation. Auditing: A Journal of Practice & Theory, 19(1), 1–25.CrossRefGoogle Scholar
  67. Kennedy, E. J., & Lawton, L. (1998). Religiousness and business ethics. Journal of Business Ethics, 17, 163–175.CrossRefGoogle Scholar
  68. Knechel, W., & Payne, J. (2001). Additional evidence on audit report lag. Auditing: A Journal of Practice & Theory, 20, 137–146.CrossRefGoogle Scholar
  69. Kogan, L., Papanikolaou, D., Seru, A., & Stoffman, N. (2017). Technological innovation, resource allocation, and growth. Quarterly Journal of Economics, 132(2), 665–712.CrossRefGoogle Scholar
  70. Kumar, A. (2009). Who gambles in the stock market? Journal of Finance, 64, 1889–1933.CrossRefGoogle Scholar
  71. Kumar, A., Page, J., & Spalt, O. (2011). Religious beliefs, gambling attitudes, and financial market outcomes. Journal of Financial Economics, 102, 671–708.CrossRefGoogle Scholar
  72. Leventis, S., Dedoulis, E., & Abdelsalam, O. (2018). The impact of religiosity on audit pricing. Journal of Business Ethics, 148, 53–78.CrossRefGoogle Scholar
  73. Leventis, S., Hasan, I., & Dedoulis, E. (2013). The cost of sin: The effect of social norms on audit pricing. International Review of Financial Analysis, 29, 152–165.CrossRefGoogle Scholar
  74. Liu, Y., Lu, H., & Veenstra, K. (2014). Is sin always a sin? The interaction effect of social norms and financial incentives on market participants’ behavior. Accounting, Organizations and Society, 39, 289–307.CrossRefGoogle Scholar
  75. Loughran, T., & Schultz, P. 2004. Dissemination of information: urban versus rural stock return patterns. Working Paper, University of Notre Dame.Google Scholar
  76. Ittner, C. D., & Larcker, D. F. (2001). Assessing empirical research in managerial accounting: A value-based management perspective. Journal of Accounting and Economics, 32(1–3), 349–410.CrossRefGoogle Scholar
  77. Lyon, J. D., & Maher, M. W. (2005). The importance of business risk in setting audit fees: Evidence from cases of client misconduct. Journal of Accounting Research, 43(1), 645–673.CrossRefGoogle Scholar
  78. Malmendier, U., & Tate, G. (2005). CEO overconfidence and corporate investment. The Journal of Finance, 60(6), 2661–2700.CrossRefGoogle Scholar
  79. Malmendier, U., & Tate, G. (2008). Who makes acquisitions? CEO overconfidence and the market’s reaction. Journal of Financial Economics, 89, 20–43.CrossRefGoogle Scholar
  80. McGuire, S. T., Omer, T. C., & Sharp, N. Y. (2012). The impact of religion on financial reporting irregularities. The Accounting Review, 87(2), 645–673.CrossRefGoogle Scholar
  81. Messier, W. F., Glover, S. M., & Prawitt, D. F. (2012). Auditing and assurance services: a systematic approach. New York: McGraw-Hill Education.Google Scholar
  82. Mikesell, J. (1994). State lottery sales and economic activity. National Tax Journal, 47, 165–171.Google Scholar
  83. Miller, A., & Hoffmann, J. (1995). Risk and religion: An explanation of gender differences in religiosity. Journal for the Scientific Study of Religion, 34, 63–75.CrossRefGoogle Scholar
  84. Moore, D. A., & Healy, P. J. (2008). The trouble with overconfidence. Psychological Review, 115, 502–517.CrossRefGoogle Scholar
  85. Osoba, B. 2003. Risk preferences and the practice of religion: evidence from panel data. Working Paper, West Virginia University.Google Scholar
  86. Ozment, S. (1991). Protestant: the birth of a revolution. New York: Doubleday.Google Scholar
  87. Perkins, H. W., & Berkowitz, A. D. (1986). Perceiving the community norms of alcohol use among students: Some research implications for campus alcohol education programming. International Journal of the Addictions, 21, 961–976.CrossRefGoogle Scholar
  88. Pirinsky, C., & Wang, Q. H. (2006). Does corporate headquarters location matter for stock returns? Journal of Finance, 61(4), 1991–2015.CrossRefGoogle Scholar
  89. Public Company Accounting Oversight Board (PCAOB). (2010). Auditing standards related to the auditor’s assessment of and response to risk. Release No. 2010-004. New YorkGoogle Scholar
  90. Schneider, C., & Spalt, O. 2013. Acquisitions as lotteries: Do managerial gambling attitudes influence takeover decisions?” Working Paper, Tilburg University.Google Scholar
  91. Scott, J., & Marshall, G. (2005). A dictionary of sociology (3rd edn.). Oxford: Oxford University Press.Google Scholar
  92. Shu, T., Sulaeman, J., & Yeung, P. E. (2012). Local religious beliefs and mutual fund risk-taking behaviors. Management Science, 58, 1179–1796.CrossRefGoogle Scholar
  93. Simunic, D. A. (1980). The pricing of audit services: Theory and evidence. Journal of Accounting Research, 18(1), 161–190.CrossRefGoogle Scholar
  94. Simunic, D. A., & Stein, M. T. (1996). The impact of litigation risk on audit pricing: A review of the economics and the evidence. Auditing: A Journal of Practice and Theory, 15, 119–134.Google Scholar
  95. Starkey, L. M. (1964). Money, mania, and morals: The churches and gambling. New York: Abingdon Press.Google Scholar
  96. Taylor, S. E., & Brown, J. D. (1988). Illusion and well-being: A social psychological perspective on mental health. Psychological Bulletin, 103, 193–210.CrossRefGoogle Scholar
  97. Weaver, G. R., & Agle, B. R. (2002). Religiosity and ethical behavior in organizations: A symbolic interactionist perspective. Academy of Management Review, 27, 77–97.CrossRefGoogle Scholar
  98. Wooldridge, J. (2006). Introductory econometrics: A modern approach (3rd edn). Cincinnati, OH: South-Western College Pub.Google Scholar

Copyright information

© Springer Nature B.V. 2018

Authors and Affiliations

  1. 1.Rotman School of ManagementUniversity of TorontoTorontoCanada
  2. 2.College of BusinessFlorida Atlantic UniversityBoca RatonUSA

Personalised recommendations