Industry-Specialist Audit Fee Premium and Financial Statement Complexity

46 Pages Posted: 23 Aug 2015

See all articles by Dichu Bao

Dichu Bao

Lingnan University

Rebecca Files

University of Texas at Dallas

Suresh Radhakrishnan

JSOM, University of Texas at Dallas

Date Written: August 20, 2015

Abstract

In this paper, we examine whether the industry-specialist audit fee premium and scale discounts are attributable to financial statement complexity. Financial statement complexity is measured using a combination of the number of Arabic numerals, the number of words, and the readability of 10-K financial statement footnotes. We find that specialist auditors charge a premium for clients with higher financial statement complexity and, correspondingly, offer scale economy discounts to these clients as well. Interestingly, even though non-specialist auditors charge a higher fee for clients with higher financial statement complexity, they do not offer scale economy discounts to these clients. We also show that a client’s financial statement complexity is distinct from its operational complexity. Collectively, our results suggest that the industry-specialist auditors’ premium is attributable to auditors’ investment in resources to handle client complexity, and not monopoly rent or compensation for audit risk.

Keywords: client complexity, specialist premium, scale economy discount, audit pricing

Suggested Citation

Bao, Dichu and Files, Rebecca and Radhakrishnan, Suresh, Industry-Specialist Audit Fee Premium and Financial Statement Complexity (August 20, 2015). Available at SSRN: https://ssrn.com/abstract=2648745 or http://dx.doi.org/10.2139/ssrn.2648745

Dichu Bao

Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Rebecca Files

University of Texas at Dallas ( email )

800 West Campbell Road, SM 41
Richardson, TX 75080-3021
United States
9728835818 (Phone)

Suresh Radhakrishnan (Contact Author)

JSOM, University of Texas at Dallas ( email )

Mail Stop SM 41
800 West Campbell Road
Richardson, TX 75080
United States
972-883-4438 (Phone)
972-883-6811 (Fax)

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