How Do Audit Team Industry and Client-Specific Experience Impact Audit Effort and Fees

Abstract

Prior research into the effect of different types of experience on audit effort and fees has been conducted at the individual, office or firm level, with an implicit assumption that the team working on each audit is invariant or irrelevant to audit effectiveness or efficiency. An important motivation for team level research is that within team variation may provide evidence on the how the structure of an audit team can influence the conduct and pricing of an audit. Using team level data provided by two mid‐tier firms, we find that audit team industry and client‐specific experience each have a unique effect on effort and fees. Specifically, team level industry experience is associated with the use of lower ranked auditors and marginally lower audit fees, while team level client‐specific experience is associated with higher hours and fees. Our results indicate that audit teams with industry experience enjoy cost savings, some of which are passed on to their clients while audit teams with client‐specific experience incur additional effort, perhaps due to increased effort in response to identified risks or by providing value‐added services, which their clients are prepared to pay for.

Keywords: industry experience; client-specific experience; audit effort; audit fees

JEL Classification: M2