The Importance of Data Security Risk in Setting Audit Fees: Evidence from Machine Learning-Based Approach

Lingyun Xiong, Linxin Peng, Lijuan Xiao and Lijuan Yang

Emerging Markets Finance and Trade, 2025, vol. 61, issue 15, 4756-4777

Abstract: Prior studies have examined the determinant factors of audit fees but overlooked the effect of enterprise data security risk on audit fees. Given the importance of auditors’ assessment of business risks and internal controls, we investigate the impact of corporate data security risk on audit fees and explore the underlying channels. We adopt the machine learning approach and textual analysis to construct a comprehensive indicator to measure corporate data security risk. Using a dataset of Chinese A-share listed companies from 2010 to 2022, encompassing 36,407 observations, we find that data security risk significantly increases firms’ audit fees. Mechanism analyses show that enterprise data security risk intensifies the operational, information disclosure and legal risk, and auditors’ extra effort. Such positive effect is stronger when auditors are more specialized; when corporate executives lack skills of information technology; and in non-high-tech enterprises, and in those firms with poor regional digital environment and digital finance and lower level of intellectual property protection. Moreover, data breaches lead to higher audit fees compared with other types of data security risk. This study sheds light on the important role of data security risk in auditing pricing decision and the significance of data security risk management in organizations.

Date: 2025
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DOI: 10.1080/1540496X.2025.2520882

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