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Unintended costs of a dual regulatory environment: Evidence from state-level cannabis legalization and bank audit fees
Journal article   Peer reviewed

Unintended costs of a dual regulatory environment: Evidence from state-level cannabis legalization and bank audit fees

James D. Brushwood, Curtis M. Hall and Eric T. Rapley
Journal of accounting and public policy, v 39(3), pp 1-17
May 2020
DOI: https://doi.org/10.1016/j.jaccpubpol.2020.106736

Abstract

Audit fees Banking Cannabis legalization Conflicting regulatory environment Enforcement uncertainty
•State-level cannabis legalization subjects federally-insured banks to a dual regulatory environment and uncertainty over the likelihood of federal enforcement.•Bank audit fees are higher after cannabis legalization for banks located in legalizing states.•Increased audit fees after legalization are most pronounced for banks reporting higher increases in banking activity. Since 2014, a number of U.S. states have legalized business activities related to the production, distribution, and use of recreational cannabis. These activities remain illegal at the U.S. federal level, creating a dual regulatory environment. The uncertainty related to the enforcement of federal cannabis laws affects businesses located in legalizing states, particularly federally-insured banks. Applying a difference-in-differences approach to a matched sample of banks in legalizing and non-legalizing states, we document an increase in audit fees incurred by banks located in legalizing states after cannabis legalization. This finding is consistent with increased auditor effort and engagement risk being an unintended consequence of state-level recreational cannabis legalization. In supplemental analysis, we find that the relation between banks’ audit fees and cannabis legalization was greater for banks having larger increases in banking activity, suggesting that audit fees increased primarily for banks that may be engaging in relationships with cannabis-related businesses.

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7 citations in Web of Science
9 citations in Scopus

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Domestic collaboration
Web of Science research areas
Business, Finance
Public Administration
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