Pricing of Initial Audit Engagements by Large and Small Audit Firms
49 Pages Posted: 8 Aug 2005
There are 2 versions of this paper
Pricing of Initial Audit Engagements by Large and Small Audit Firms
Pricing of Initial Audit Engagements by Large and Small Audit Firms
Date Written: July 2005
Abstract
We investigate the extent to which auditors of U.S. companies reduce fees on initial audit engagements (termed 'fee discounting'). We hypothesize that rivalry among sellers, in terms of client turnover and price competition, is more intense among smaller audit firms. The data support this hypothesis. New clients account for 34% of all clients for small audit firms, but only 9% of all clients of larger audit firms. We theorize that the different client turnover rates between large and small audit firms can be explained by the market structure of the audit industry, which consists of an oligopolistic segment dominated by a few large audit firms and an atomistic segment comprised of many small audit firms. Further, we hypothesize and confirm that fee discounting is more extensive in the atomistic sector. The analysis of audit fee changes indicates that clients switching auditors within the atomistic sector get a 24% average discount over the prior auditor's fee. However, clients switching within the oligopolistic sector, receive a discount of only 4%. Since price competition is known to be less intense in oligopolistic compared to atomistic markets, we believe that market structure theory can explain why fee discounting is lower when larger audit firms compete for clients.
Keywords: audit fee, initial audit engagement, client turnover
JEL Classification: M49, L84
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Relation between Auditors' Fees for Non-Audit Services and Earnings Management
By Richard M. Frankel, Marilyn F. Johnson, ...
-
Do Non-Audit Service Fees Impair Auditor Independence? Evidence from Going-Concern Audit Opinions
By Mark L. Defond, Kannan Raghunandan, ...
-
By Rick Antle, Paul A. Griffin, ...
-
Evidence on the Joint Determination of Audit and Non-Audit Services
-
The Joint Determination of Audit Fees, Non-Audit Fees, And Abnormal Accruals
By Rick Antle, Elizabeth A. Gordon, ...
-
The Jointness of Audit Fees and Demand for MAS: A Self-Selection Analysis
-
Engagement Planning, Bid Pricing, and Client Response in the Market for Initial Attest Engagements
By Karla M. Zehms and Jean C. Bedard
-
Disclosure of Fees Paid to Auditors and the Market Valuation of Earnings Surprises
By Jere R. Francis and Bin Ke
-
Non-Audit Services and Earnings Conservatism: Is Auditor Independence Impaired?
By Caitlin M. S. Ruddock, Sarah J. Taylor, ...