Audit fee stickiness

2013 ◽  
Vol 29 (1) ◽  
pp. 2-26 ◽  
Author(s):  
Charl de Villiers ◽  
David Hay ◽  
Zhizi (Janice) Zhang
Keyword(s):  
Audit Fees ◽  
Audit Committees ◽  
Future Research ◽  
Audit Pricing ◽  
Content Type ◽  
Audit Market ◽  
Audit Fee ◽  
The Usa ◽  
The Difference ◽  
One Year

Purpose – This study aims to contribute to the understanding of audit pricing and the competitiveness of the audit fee market by examining audit fee stickiness. Design/methodology/approach – The authors explore the price behavior of audit fees in response to changes in the variables that are usually seen as their determinants, such as size, complexity, and risk in order to examine audit fee stickiness and the competitiveness of the market for audit services. Findings – The authors find that audit fees are sticky, i.e. audit fees do not immediately or fully adjust to changes in their determinants. Audit fees also respond to changes leading to an increase more quickly than they respond to changes leading to a decrease. The difference between positive and negative fee adjustments declines over periods longer than one year and is no longer significant when four-year periods are considered. Research limitations/implications – The study is limited to companies in the USA from 2000 to 2008. Future research should examine this issue in other settings and periods. Practical implications – The results suggest that the audit market is competitive, at least in the medium term. Originality/value – The study helps to explain why the audit fee model does not fully explain the level of audit fees; why audit fees are more likely to be too high than too low; and why auditor switches are commonly associated with larger changes in audit fees. The findings provide evidence that may be useful to managers and audit committees when managing their audit fees, auditors when considering the risks and opportunities associated with changes in the determinants of audit fees, and regulators concerned with the competitiveness of the audit market.

Audit prices and Big 4 fee premiums: further evidence from Thailand

2017 ◽  
Vol 7 (1) ◽  
pp. 2-15 ◽  
Author(s):  
Thanyawee Pratoomsuwan
Keyword(s):  
Price Competition ◽  
Stock Exchange ◽  
Audit Fees ◽  
Audit Pricing ◽  
Content Type ◽  
Audit Market ◽  
Big 4 ◽  
Audit Fee ◽  
The Usa ◽  
Using Data

Purpose Because there is mixed evidence regarding Big N fee premiums across countries, the purpose of this paper is to re-examine the phenomenon of audit price differentiations in the market for auditing services in Thailand. Although Hay et al. (2006) and Hay (2013) reviewed over 80 audit fee papers from 20 countries over 25 years, 13 of which were based in emerging economies, the understanding of the market for auditing services in Thailand remains limited. Because the Thai auditing market is also classified as a segmented market – i.e., a market that is less competitive for large-client firms and more competitive for small-client firms – this study tests audit price competition in an emerging audit market using Thailand as an example. Design/methodology/approach The traditional audit fee model is used to estimate audit fee premiums for a sample of over 300 non-financial companies listed on the Stock Exchange of Thailand in 2011. Findings Although the market for auditing services in Thailand is consistent with that described in Ferguson et al. (2013) – in which Big N audit firms dominate only the large-client segment – the results show that Big N auditors charge higher audit fees and earn higher fee premiums compared with non-Big N auditors in both the small- and large-client segments of the audit market. Research limitations/implications The evidence from this study reveals the existence of Big N fee premiums across market segmentations. Audit price differentials between Big N and non-Big N firms in both small- and large-client market segments might concern regulators regarding competition in the audit market with respect to whether the Big N firms are charging uncompetitive audit fees. These findings also imply that audit pricing varies across countries and the Big N price deferential is typically larger in emerging markets than in more developed audit markets and that it might be inadequate to study single-country audit pricing. However, the question whether the Big N fee premium results from Big N product differentiation is not directly investigated in this study. Originality/value Because earlier studies focusing on audit fee premiums have been conducted using data from the USA and Australia, the findings add to the limited evidence regarding audit fee premiums in an emerging country such as Thailand.

The impact of market inequality on audit price

2019 ◽  
Vol 34 (9) ◽  
pp. 1149-1172
Author(s):  
Kimberly Dunn ◽  
Mark Kohlbeck ◽  
Brian Mayhew
Keyword(s):  
Market Structure ◽  
Audit Fees ◽  
Opposite Pattern ◽  
Content Type ◽  
Audit Market ◽  
Industry Level ◽  
The Usa ◽  
National Industry ◽  
The Impact ◽  
The City

Purpose This paper aims to evaluate policymakers’ concerns about the lack of competition in highly concentrated markets for public company audits by examining the association between audit fees and the inequality of Big 4 market shares at both the USA national-industry and city-industry levels. Design/methodology/approach Using publicly available data, this paper uses regression analysis to examine publicly available data to test research hypotheses related to the association between audit market inequalities and audit fees at both the USA national-industry and city-industry levels. Findings The findings support a U-shaped association between national-industry inequality and audit fees. As inequality initially increases, fees decrease; however, as inequality becomes increasingly large fees increase. The city-industry level analysis shows the opposite pattern. The results are consistent with capacity constraints at the national-industry level that are less binding at the city-industry level. Research limitations/implications This study provides evidence that market inequality has a non-linear association with audit price and contributes to the limited findings in industrial organization research on the importance of market share inequality in highly concentrated markets. Originality/value This study provides new insights into the growing body of research on audit market structure by documenting that national-industry and city-industry analysis provides different insights into the market structure. In addition, the sample period for this study (2004-2017) addresses the General Accounting Office (GAO) concern about the lack of a stable audit market in the period it examined (GAO, 2008, p. 94) and finds evidence of market structure effects not present in the earlier GAO studies (GAO, 2003, 2008).

Auditor switching and audit fee discounting: the Iranian experience

2017 ◽  
Vol 25 (3) ◽  
pp. 335-360 ◽  
Author(s):  
Fakhroddin MohammadRezaei ◽  
Norman Mohd-Saleh
Keyword(s):  
Bargaining Power ◽  
Initial Period ◽  
Audit Fees ◽  
Maximum Point ◽  
Content Type ◽  
Auditor Switching ◽  
Audit Market ◽  
Audit Fee ◽  
Relative Bargaining Power ◽  
The Impact

Purpose The purpose of this paper is to examine the impact of auditor switching on audit fee discounting in Iran. The increased competition in the Iranian audit market following audit market liberalization in 2001 has resulted in a rapid increase in auditor switching and reduces the relative bargaining power of auditors compared to the clients. It is expected that auditor switching results in fee discounting because the relative bargaining power of an auditor (client) is likely to be at the minimum (maximum) point during the initial period of engagement. Since the increased bargaining power of a client in initial year seems to be different in the case of different type of auditor switching (from a state auditor to a private and from a private auditor to another), the magnitude of fee discounting is expected to be different. Design/methodology/approach The objective is tested using a sample of 1,022 firm-year observations between 2001 and 2010. This study applies the multivariate regression model using the first difference specification of audit fee as a dependent variable. Findings Multivariate analysis reveals that auditor switching results in 14 percent of fee discounting. In addition, the results show that 18 and 13 percent of fees discounting during the initial year of engagement arise from cases of auditor switching involving a change from state auditors to private auditors, and a change from one private auditor to another, respectively. The findings support bargaining power view explanation in relation to audit fees discounting in initial year engagement. Originality/value This study is the first to examine the impact of auditor switching (and analyzed different types of auditor switching) on audit fee discounting using the bargaining power view.

Industry specialization and audit fees: a meta-analytic approach

2015 ◽  
Vol 28 (3) ◽  
pp. 419-435 ◽  
Author(s):  
Cristina de Fuentes ◽  
Eva Sierra
Keyword(s):  
Meta Analysis ◽  
Audit Fees ◽  
Future Research ◽  
Published Data ◽  
Industry Specialization ◽  
Content Type ◽  
Analysis Techniques ◽  
Audit Market ◽  
Regulatory Bodies ◽  
Auditor Specialization

Purpose The purpose of this paper is to provide a comprehensive review of the literature that links auditor’s industry specialization (AIS) and audit fees (AFs) in order to clarify the puzzle of published results and provide overall conclusions that would help in future research. Design/methodology/approach To achieve this goal, the authors applied meta-analysis techniques in order to summarize, quantify and evaluate the published data related to the association between AIS and AF. Findings The meta-results are more robust when the proxy for AIS is the audit firm’s market share above 20 percent or the audit firm is jointly the national and city leader. For US-based studies, results are homogeneous in the post-SOX period. This is likely due to the higher demand for specialized auditors. The authors found positive and homogeneous results in the upper and lower market segment, which led to the conclusion that the bargaining power of the big auditees does not fully counteract the higher auditor specialization costs. Although the authors identified a publication selection bias, a specialization coefficient of around 2.0 percent was estimated. Originality/value The conclusions are relevant for those researchers that would benefit from a structured and systematic review of the published results. The outcomes help to understand the somehow contradictory empirical evidence and to provide solid foundations for future hypothesis developments. This contribution is also relevant for the regulatory bodies, always watchful of audit market behavior and the evolution of audit prices.

Financial report readability and audit fees: a simultaneous equation approach

2019 ◽  
Vol 35 (3) ◽  
pp. 345-372
Author(s):  
Qiao Xu ◽  
Guy Fernando ◽  
Kinsun Tam ◽  
Wei Zhang
Keyword(s):  
Positive Impact ◽  
Audit Fees ◽  
Simultaneous Equation ◽  
Poor Quality ◽  
Audit Committees ◽  
Future Research ◽  
Financial Reports ◽  
Content Type ◽  
Financial Report ◽  
Practical Implications

Purpose This paper aims to investigate whether audit fees and financial report readability are bi-directionally related. Design/methodology/approach The authors test their hypotheses with empirical data. Specifically, they adopt a two-stage simultaneous equation regression model to assess the bi-directional relationship between audit fees and financial report readability. Findings While poor readability increases the fees charged by the auditor, higher audit fees improve the readability of the financial reports. Research limitations/implications This study is based on US data. Future research may extend this study to other countries. Practical implications Poor financial report readability encumbers stakeholders of the firms. Understanding the interaction between financial report readability and audit fees will help both auditors and firm managers. Social implications Audit committees aggressively negotiating for lower audit fees should be aware of the link of low audit fees, potentially indicative of poor quality, to less readable reports. Investors and regulators too should be concerned about this relationship, especially in instances when auditors low-ball audit fees or when firms aggressively negotiate for lower audit fees. Originality/value To the best of authors’ knowledge, this study is the first to document the bi-directional relationship between financial report readability and audit fees and assess the positive impact of audit fees on financial report readability.

Governmental customer concentration and audit pricing

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Hanmei Chen ◽  
Weishi Jia ◽  
Shuo Li ◽  
Zenghui Liu
Keyword(s):  
Audit Fees ◽  
Audit Pricing ◽  
Cross Sectional ◽  
Content Type ◽  
Listed Firms ◽  
External Monitoring ◽  
Variable Approach ◽  
The Usa ◽  
Using Data ◽  
Treat All

Purpose The purpose of this paper is to examine how the concentration of a specific customer type – governmental customer, affects the pricing of audit services in the USA. Design/methodology/approach This paper applies a standard audit pricing model by regressing audit fees on governmental customer concentration and other common determinants of audit fees. This paper also adopts an instrumental variable approach and performs propensity-score matched sample analyzes to mitigate the potential endogeneity problem. Findings Using data from major customer disclosures of US publicly listed firms from 2000 to 2014, this paper finds that governmental customer concentration is positively associated with audit fees, suggesting that a higher level of governmental customer concentration increases a firm’s audit risks and audit effort. In addition, this paper performs cross-sectional analyzes and show that the association between governmental customer concentration and audit fees is more pronounced for firms with weak internal governance, weak external monitoring and high financial risks. Originality/value This paper furthers the understanding of the interactive relationships in supply chain systems and adds new evidence to the literature on customer concentration. Prior studies on customer concentration typically treat all customer types in a uniform manner. To the knowledge, this is the first study that separates governmental customers from other types of customers in an audit pricing setting. The findings highlight the importance of examining governmental customer concentration when assessing a firm’s audit risks and audit fees.

Local accounting firms’ pricing responses to entry of the Big Four accounting firms into China

2016 ◽  
Vol 6 (1) ◽  
pp. 50-68 ◽  
Author(s):  
Vikram Desai ◽  
Bixia Xu ◽  
Tao Zeng
Keyword(s):  
Market Entry ◽  
Audit Fees ◽  
Annual Reports ◽  
Pricing Strategies ◽  
Accounting Firms ◽  
Content Type ◽  
Audit Market ◽  
The Usa ◽  
Audit Reports ◽  
Big Four

Purpose – The historical development and size of China’s audit market provides an opportunity to investigate important questions regarding the functioning of the market for audit services that are difficult, if not impossible, to test in other globally established markets. The purpose of this paper is to examine the effect of the market entry of the Big Four accounting firms into China on the audit fees charged by its local accounting firms. Design/methodology/approach – In this paper the authors rely primarily on the incumbent pricing literature (Simon, 2005; Geroski, 1995) to assist them in developing the specific hypotheses and empirical tests. This paper is an empirical study, which examines whether local incumbent accounting firms cut prices in response to the Big Four’s entry by using data from annual reports and audit reports for China’s listed companies from the 1994 to 2008 period. Findings – This study shows that local incumbent firms cut prices post-entry. This study also finds that it was local large-sized accounting firms as well as accounting firms located in regions with highly developed- and competitive markets that cut prices in response to the Big Four’s entry. Practical implications – This study has important implications for the Big Four accounting firms as it provides useful information about pricing strategies that would likely be used by local accounting firms in a new market. Local accounting firms in emerging markets can also gain useful insights about the pricing strategies adopted by the Big Four accounting firms when they enter a market. Originality/value – Audit market research has little to offer on how local accounting firms respond in their pricing to the entry of Big Four accounting firms into their market, mainly because in western countries such as Canada, England, and the USA, the Big Four accounting firms are the oldest firms operating in those markets. This paper is the first study that examines the effect of the market entry of the Big Four accounting firms into China.

The impact of audit committee effectiveness on audit fees and non-audit service fees

2018 ◽  
Vol 31 (2) ◽  
pp. 174-191 ◽  
Author(s):  
Muhammad Jahangir Ali ◽  
Rajbans Kaur Shingara Singh ◽  
Mahmoud Al-Akra
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Audit Fees ◽  
Audit Committees ◽  
Regulatory Requirements ◽  
Content Type ◽  
Financial Expertise ◽  
The Difference ◽  
Accounting Expertise ◽  
The Impact

Purpose The purpose of this study is to examine the impact of audit committee effectiveness on audit fees and non-audit service (NAS) fees in a less regulatory environment. Design/methodology/approach The authors construct a composite audit committee effectiveness measure incorporating audit committee independence, diligence, size, financial expertise and the chairperson’s accounting expertise. Findings The authors find that audit committee effectiveness has a positive significant impact on both audit fees and NAS fees. This suggests that effective audit committees can hold auditors accountable resulting in better audit quality and consequently higher audit fees. Originality/value The link between more effective audit committees with higher NAS purchases can be explained in light of the difference in regulatory requirements providing audit committees with decision rights on the use of NASs, therefore approving more NAS and increasing NASF. Additional tests and robustness analyses confirm the results.

Audit fees via an indirect payment channel and professional skepticism

2018 ◽  
Vol 33 (5) ◽  
pp. 517-534 ◽  
Author(s):  
Sanghun Kim ◽  
Taewoo Kim ◽  
Sujin Pae ◽  
Sangphill Kim
Keyword(s):  
Audit Fees ◽  
Payment System ◽  
Future Research ◽  
Systematic Change ◽  
Content Type ◽  
Professional Skepticism ◽  
Scarce Resources ◽  
Big 4 ◽  
Audit Fee ◽  
Auditor Judgments

Purpose This paper aims to examine the merit of an indirect payment system for audit fees, a system where an intermediary collects fees from the auditee and then pays this audit fee to the auditor. Design/methodology/approach Big 4 auditors and professional analysts in South Korea participated in an experiment and survey to investigate whether the change in the payment channel (from direct to indirect) of audit fees positively impacts auditors’ decision-making. Findings The authors find evidence that the indirect payment of audit fees is positively associated with professional skepticism. Research limitations/implications This paper, by highlighting the potential for alternate auditor payment channels to improve the quality of auditor judgments, motivates future research in this area. Practical implications Qualified by the need for further research, the potential merit in an indirect payment system may have implications for audit regulators. Social implications An indirect payment channel has the potential to improve public perceptions of the audit function, thereby elevating society’s confidence in auditor opinions and improving the effectiveness and efficiency with which scarce resources are distributed within society. Originality/value This study is one of the first that looks into a systematic change in audit fee payment channel and how an indirect payment system of audit fees impacts professional skepticism.

scholarly journals Audit fee discounting in the post-SOX environment

2017 ◽  
Vol 32 (7) ◽  
pp. 715-730 ◽  
Author(s):  
Benjamin W. Hoffman ◽  
Albert L. Nagy
Keyword(s):  
Positive Association ◽  
Audit Fees ◽  
Ordinary Least Squares ◽  
Least Squares Regression ◽  
Audit Pricing ◽  
Significant Positive Association ◽  
Content Type ◽  
Sarbanes Oxley ◽  
Sensitivity Tests ◽  
Audit Fee

Purpose This paper aims to investigate whether the expected implementation of Section 404(b) of the Sarbanes-Oxley Act (SOX 404(b)) (the integrated audit requirement) caused auditors to discount their audit fees for non-accelerated filers in anticipation of expected increased future economic rents (DeAngelo, 1981) from those clients. Design/methodology/approach This paper predicts that auditors charged their non-accelerated filer clients lower audit fees during the years 2005-2007 (in anticipation of increased expected future economic rents from the implementation of the SOX 404(b) requirement) compared with the years 2010-2012 (when it had been determined that non-accelerated filers were permanently exempt from complying with SOX 404(b)). The authors use ordinary least squares regression analysis to examine whether audit fees increased significantly for non-accelerated filers after the permanent exemption announcement. Findings The results show a significant positive association between the exemption announcement and audit fees, supporting the theory that auditors discounted their audit fees for non-accelerated filers in the pre-exemption announcement period. This finding is robust when sensitivity tests are used. Practical implications The findings of audit fee discounting literature related to the post-SOX period are mixed. This study adds to this stream of literature by supporting the notion that audit fee discounting is being practiced post-SOX and is a potential unintended consequence of SOX 404 and the exemption. Thus, investors will be interested in the results of this paper when making their investment decisions with regard to non-accelerated filers. Social implications The results of this paper show that, even in the post-SOX environment, auditors will employ the use of audit fee discounting if a change in regulation incentivizes it. This commentary on the present state of the audit pricing market should be of interest to audit pricing policymakers. Originality/value This paper is one of the first to study audit fee discounting outside the realm of initial audit engagements.

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