We study the pricing of audit services for strategic alliances, a governance structure involving an incomplete contract between separate firms. Since incomplete contracts do not specify all future contingencies, we expect that the nonverifiability of information and potential agency behavior in alliances increase audit complexity, resulting in higher audit fees. Our findings support this prediction. We then separate strategic alliances into joint ventures and contractual alliances, as the latter involve more complexity. We find that our audit fee results are largely driven by contractual alliances. We perform additional tests to rule out the concern that our audit fee results might be attributable to the impact of strategic alliances on distress risk, audit risk, or control risk. Contrary to the distress risk argument, we find that auditors are less likely to issue going‐concern modified opinions when there is an increase in strategic alliances. Contrary to the audit risk argument, we find that an increase in strategic alliances is unrelated to the likelihood of financial misstatements. Contrary to the control risk argument, we find that an increase in strategic alliances is unrelated to internal control weakness opinions.

This study investigates the role of employment policies in reducing internal control ineffectiveness and financial restatements. We provide new evidence that employee treatment policies are an important predictor of ineffective internal control. We also find that employee-friendly policies significantly reduce the propensity for employee-related material weaknesses. These results suggest that greater employee benefits facilitate the acquisition, development, and motivation of the workforce and ameliorate the loss of valuable human capital, thereby mitigating employee failures to implement internal control tasks properly. Moreover, we document novel results that financial restatements, especially those caused by unintentional errors, are less likely to arise in firms that invest more in employee benefits. Collectively, our emphasis on the effect of employee treatment policies on the integrity of internal control and financial reporting distinguishes our paper from previous studies that focus on the role of top executives in accounting practices. Data Availability: Data are available from public sources indicated in the text.