This study aims to investigate how a firm’s engagement in foreign direct investments (FDIs) affects the firm’s audit outcomes.
Using project-level FDI information from Orbis provided by the Bureau van Dijk, the authors use OLS and probit regressions in their empirical analyses. They also undertake instrumental variable regressions using natural disaster shocks in destination countries, identified using the EM-DAT database administered by the Center for Research on the Epidemiology of Disasters, to address potential endogeneity issues and establish causal inferences.
The authors find that firms that announce FDI, engage in a larger number of FDI projects, or undertake more intensive FDI engagements incur higher audit fees. The authors also find that FDI-active firms exhibit a higher likelihood of receiving going-concern audit opinions when they engage in FDI activities or their FDI engagements are more intensive. These findings suggest that auditors recognize elevated audit risks arising from the complexity and uncertainty associated with FDI activities. Further analysis indicates that country-level corruption influences how FDI engagement affects auditors’ risk assessments, highlighting the role of both project attributes and host country attributes.
The findings of this study suggest that not only does a firm’s FDI facilitate the firm’s strategic business objectives but FDI also has significant implications for its financial reporting environment and audit outcomes.
