Economic Freedom and Audit Fees: Evidence From the <scp>USA</scp>

ABSTRACT We examine the association between US state‐level economic freedom and audit fees. We argue that economic freedom lowers clients' perceived business risk, thereby requiring reduced audit effort and exposing auditors to a lower probability of litigation risk, which enables auditors to charge lower audit fees to clients headquartered in states with high economic freedom. Using a US sample, we find a negative association between economic freedom and audit fees. Our study contributes to the emerging literature on socio‐economic determinants of audit fees by providing evidence that economic freedom reduces overall inherent risk, thereby reducing audit risks.