Is the audit services market competitive following Arthur Andersen's collapse?

This study investigates whether audit markets remain competitive in the wake of Arthur Andersen's demise and merger with Ernst & Young to create the Big Four. We conduct the study estimating audit fee models using Australian audit market data from both 2000 and 2003 to determine whether there is any evidence of cartel pricing either before, or subsequent to, the merger. In both years, we find evidence of a Big N price premium when estimating an audit fee model across all clients, and when we estimate the model separately across large and small client market segments. This evidence is consistent with product differentiation by Big N auditors and competitive markets.     

Note on Self‐Selection of Auditors in the Municipal Sector*

The objective of this article is to revisit the literature on Big‐N audit fee premiums in the municipal setting using a methodology that controls for self‐selection bias. Because auditor choices can be predicted based on certain client characteristics, using standard one‐stage ordinary least squares regressions to draw inferences about the presence or absence of such a premium in the extant public‐sector audit fee studies may not be appropriate. Results indicate that, after controlling for a self‐selection bias, Big‐6 (non‐Big‐6) municipal clients on average pay a fee premium, compared to the case if they were to retain a non‐Big‐6 (Big‐6) auditor. Results continue to hold when we conduct further analyses on a subset of municipalities with access to both Big‐6 and non‐Big‐6 auditors in a local market defined by a 60‐km radius, rather than over a province‐wide audit market. The existence of non‐Big‐6 audit fee premiums has not been documented previously in the private‐ or public‐sector audit fee literature. We surmise that it may be caused by the dominance (79.4 percent) of non‐Big‐6 auditors in the Ontario municipal market, compared to most private‐sector audit markets where their market share generally does not exceed 20 percent. The strong market position of non‐Big‐6 firms in turn may have allowed these auditors to command a fee premium for the subset of municipalities that self‐selects to be audited by them. An implication from our study is that Ontario municipalities often choose to be audited by more costly auditors, even though they could have paid lower audit fees by switching to an alternative auditor type. These results do not support those reported by Chaney et al. (2004) , who find that U.K. private firms are audited by the least costly auditor type. The conflicting findings may be attributable to the fact that the Ontario municipal audit market is subject to regulation by not just the audit profession but also the Ontario government and that, unlike business corporations, municipalities receive funding from provincial governments to fulfil much of their financial requirements. Thus, municipal clients may be relatively more willing to accept higher audit fees provided their chosen auditor (or auditor type) matches their needs.     

The effect of large audit firm mergers on audit pricing in the UK

This paper examines the effects on UK audit market concentration and pricing of mergers between the large audit firms and the demise of Andersen. Based on data over the period 1985–2002, it appears that mergers contributed to a rise in concentration ratios to levels that suggest concern about the potential for monopoly pricing. The high concentration ratios have not improved the level of price competition in the UK audit market. Our pooled models suggest that concentration ratios are associated with higher audit fees. The evidence suggests that the effects of mergers between big firms on brand name fee premium and on price competition vary depending on the particular circumstances. The brand name premium is strongest for the largest quartile of companies prior to the mergers. After the Big Six mergers, the premium increases for average‐sized companies but falls for the smallest and largest companies. Following the PricewaterhouseCoopers merger, the premium increases for below median‐sized clients but decreases for above‐median sized clients. For the Deloitte‐Andersen transaction, the premium falls for the smallest and largest companies but increases for those in the second quartile. Our results provide evidence that auditees are likely to pay higher fees if their auditor merges with a larger counterpart. We attribute merger‐related fee hikes to product differentiation, rather than anti‐competitive pricing.     

Large audit firm premium and audit specialisation in the public sector

The outsourcing of public‐sector audits to the private sector is an important issue. This study examines the fee premium in the public sector by comparing audit fees between the government auditor and the Big5. The study (i) statistically adjusts for self‐selection bias, (ii) allows the slope coefficients in the audit fee model to vary between the Big5 and the government audit and (iii) estimates the counterfactual audit fee premium. The Big5 premium is around 23 percent. However, the variation in premium depends on whether the Big5 auditor is an industry or city specialist.     

Size effects and audit pricing: Evidence from Germany

Previous research into audit pricing has focused on the US and Australasian markets. This study aims to elaborate on the role played by various size effects on audit pricing using data from the German market.As previous research has shown, audit firms that provide additional non-audit services are able to charge higher fees for auditing. By contrast, our results show that only Big 4 auditors can earn an audit fee premium by providing non-audit services.Our findings also show that the Big 4 premium shown by previous German research is strongly affected by the premium for overall market leadership. Furthermore, we find that the influence of risk variables such as leverage or past losses is significant only for small auditees, while for large auditees size is the determining factor.Finally, this study proposes that using the logarithm of the number of employees is a better proxy for company size than is the more commonly used logarithm of total assets because it is more constant over time and does not bear the risk of interdependencies with other financial statement-based variables. Therefore, its further use in audit pricing research is strongly recommended.     

Audit fee determinants and auditor premiums: evidence from the micro-firm sub-market

Despite the growing literature on the market for audit services, to date no study has examined the determinants of audit fees for the smallest auditees in the market. This study therefore provides some new theory and evidence on the determinants of the audit fees of micro-firms operating in the UK manufacturing sector. A key finding of the study is that in the highly competitive market under consideration, independent small auditees willingly paid a premium to be audited by a mid-tier or a (then) Big Six auditor, with the latter commanding the higher premium. It is concluded that these findings are consistent with Big Six (and, to a lesser extent, mid-tier) auditors commanding a brand premium stemming from the (perceived) higher quality audit conducted by large auditors, for which small firms are willing to pay a premium in order to benefit from associated ‘reputational’ and ‘signalling’ effects. The common finding that the explanatory power of audit fee models declines as a function of firm size is also examined. The empirical analysis confirms this effect, but evidence is offered that, rather than resulting from model misspecification, it is likely that audit prices of the smallest auditees are relatively insensitive to variations in corporate size, which may result from lower incremental economies of scale and minimum pricing.     

Auditor Market Share,Product Differentiation and Audit Fees

This study examines the effects of auditor market share and product differentiation on audit fees. Previous studies have attributed the price premium charged by the Big Eight (the Big Six in the present study) to Big Eight product differentiation. However, such a price premium could be partly due to monopoly pricing. In the present study, the Hong Kong audit market provides a unique setting in which a non-Big Six local auditor has a market share comparable to those of the third and fourth largest Big Six firms. This makes it feasible to control for the effects of market share via matching. Also, the wide disparity among the Big Six firms ‘market shares in Hong Kong makes it feasible to test for the effects of market power on audit fees. The results show that, consistent with prior studies, the Big Six audit firms charge higher audit fees than non-Big Six firms in the small auditee, but not the big auditee, market. This suggests that similar economic forces to those other audit markets are also at work in Hong Kong. Despite the Big Six firms’ widely different market shares, there was no price differentiation among them. Yet there was a Big Six price premium over the large local firm with a similar market share to those of two of the Big Six. Together, these results suggest that the Big Six price premium is a result of product differentiation rather than monopoly pricing.     

The Effect of Client Industry Agglomerations on Auditor Industry Specialization

Prior research on auditor industry specialization documents fee premiums for local audit offices that are industry specialists. This research assumes that the effects of specialization are uniform across markets. We examine industry specialization based on the economic theory of industry agglomeration (geographic areas with high industry concentration). Agglomeration economies can facilitate access to knowledge for auditors serving a specific industry in those locations. We find that industry specialists in agglomerations earn a fee premium in excess of specialists in other markets. We find that nonspecialist offices in agglomerations also earn fee premiums in that industry when compared to nonspecialists in other markets even when controlling for these groups’ absolute share of the national market. We also address whether or not this expertise can be shared among offices in an agglomeration specialist's firm. We find that audit offices that have easy connections to a within-firm office in an agglomerated market can earn a fee premium relative to more distant offices, suggesting a benefit from knowledge transfer. This fee premium accrues to offices that would not be considered a specialist using traditional market share measures in a given industry. These findings indicate that the benefit of industry specialization depends on more than local market share.     

Audit pricing and auditor industry specialization in an emerging market: Evidence from China

In this paper we examine the determinants of audit fees by focusing on auditor industry specialization and second tier auditors in the Chinese market. We find evidence of Big 4 premiums for brand name as well as industry specialization in both the statutory and supplementary market. Big 4 industry specialists earn additional premiums in the statutory market as compared to non-industry specialists. We also find that market expansion did not provide the second tier auditors any price advantage. These auditors increased their market share mainly in the mid- and small-sized clienteles. Moreover, industry experience developed by the second tier firms may have helped them gain economy of scale and reduce service fees. This may be their strategy to win future clients that seek low-priced audits.     

中国内资会计师事务所合并效果研究——基于国际“四大”审计收费溢价的分析

近年来,我国注册会计师行业管理部门颁布了一系列政策法规,大力鼓励内资事务所进行合并以实现行业做大做强的目的。本文比较分析了2002-2008年内资事务所和"四大"审计收费情况,发现经历第一轮合并浪潮后审计收费溢价仍在不断增加。针对这一现象,我们深入挖掘了其内在原因,总结了经验教训,并结合相关部门2009年以来一系列最新措施,对已经拉开帷幕的新一轮的内资事务所合并提出了对策建议。     

中国本土会计师事务所的市场地位与经济回报

区域规模化和行业专长化是会计师事务所通常采取的两种发展战略。本文分析和比较了具有区域市场领先地位以及具有行业市场领先地位的中国本土会计师事务所伴随的经济回报(以审计定价度量)。基于全样本的证据显示:本土会计师事务所仅仅通过在各省际市场取得领先地位并不足以获取明显的经济回报;具备行业市场领先地位则伴随着显著更高的经济回报;同时具备行业市场领先地位和区域市场领先地位则伴随着更大的经济回报。进一步的分析显示,不同本土会计师事务所可能需要考虑在发展战略及其实现途径上的差异化。本文的发现对本土会计师事务所制定符合自身特征的发展战略具有启示意义。     

The effect of audit firm size on audit prices: A study of the Australian Market

The effect of audit firm size on prizes is a complex function of competition in the market for audit services, product differentiation, and scale economics to large firms. In this study, a competitive market is supported in Australia with product differentiation to Bif Eight accounting firms. Specially, Big Eight accounting firms have significantly higher audit prices than non-Big Eight firms. This results holds for ‘large’ and ‘small’ auditees. A test is also made of price cutting in the Australian market. Price cutting is defined as lower initial audit fees than continuing engagement fees for a comparable audit. Test results do not evidence price-cutting behavior by accounting firms. There is in fact weak evidence that initial audit fees are higher than continuing engagement fee levels. Higher initial fees suggest that accounting firms may recover at least some of the audit start-up costs immediately.     

An empirical analysis of audit fee price competition after the Korean 1999 Omnibus Cartel Repeal Act

This study examines the audit service market in Korea after the 1999 Omnibus Cartel Repeal Act to determine if increased competition has led to audit fee discounting. Until 19 December 2001, when the Korean government enacted The Financial Supervisory Regulations, researchers could not address questions related to price competition in the Korean audit market due to data limitations. The new regulations allow researchers to examine audit effort for the first time because both audit hours and audit fees are now recommended disclosures. We use audit fee data of Korean companies for the 6-year period 1999–2004, and find evidence that total audit fees paid have been increasing but audit fees per hour have been decreasing. We also find that Big 5 auditing firms’ fees per hour are significantly lower than non-Big 5 auditing firms and are decreasing across time. These price pressures should be of concern to regulators and investors because prior research has demonstrated that price competition leads to discounting, which can result in unrealistically low audit fees and poor audit quality. Finally, as in previous research, we also find discounting of initial audit engagements in the Korean market.     

The determinants of audit fees—evidence from the voluntary sector

Given the growing demand for accountability in the public sector, there is a need to begin to investigate audit pricing issues in this sector. This study makes three contributions. First, it develops and estimates, for the first time, a model of audit fee determinants for the charity sector. As in previous private sector company studies, size, organisational complexity and audit firm location are the major determinants. A positive association between audit fees and fees for non-audit services is also observed. Charity sector factors of empirical significance include the nature of the charity (i.e., grant-making or fund-raising), its area of activity and the importance of trading income. Separate models for grant-making and fund-raising charities reflect the relative complexity of the audit of fund-raising charities. Second, the lower auditor concentration in the charity sector market, compared to the private sector market, permits a more powerful test of whether large firms and/or auditor expertise are rewarded with a fee premium. In the more complex audit environment of fund-raising charities, the results show that Big Six audit firms receive higher audit fees (18.5%, on average) than non-Big Six firms. Also, non-Big Six audit firms with charity expertise are rewarded with a fee premium over other non-Big Six firms. Finally, the study demonstrates that the charity audit fee rate is significantly lower than that of private sector companies; in fact it is approximately half. A change in the reporting of charity audit fees is proposed to reflect any element of ‘charitable giving’ by the audit firm.     

Agency costs and product market competition: The case of audit pricing in Greece

Jensen and Meckling (1976) argue that agency costs are not dependent on product market competition. However, elsewhere in the economics literature, theoretical analysis and empirical research have indicated that product market competition reduces agency costs by reducing the marginal cost of eliciting effort from agents. We investigate the relationship between product market competition and audit fee, as an example of agency cost. Taking advantage of a proprietary data set for Greek audit firms, we find that the audit fee and audit hours are inversely associated with client firm product market competition. We conclude that audit effort, as an agency cost, is reduced where competitive forces reduce the need for shareholders to bear the costs of monitoring agents.     

会计师事务所合并与审计定价——基于2003—2009年十起合并案面板数据的研究

会计师事务所合并究竟是会提高还是会降低审计收费,取决于合并后事务所声誉及市场势力提升所带来的审计溢价与规模效应所导致的审计成本降低两方面孰者相对占优。文章以我国2003—2009年间十起事务所合并案为对象,利用其上市公司客户在事务所合并前后各2年的面板数据,检验了事务所合并对审计定价的影响。结果发现,事务所合并后,其审计收费显著提高。对所有事务所客户审计费用的横向比较也印证了上述结论。研究还发现,事务所合并后第一年审计收费的提升较第二年更为明显;就稳定客户数据而言,本土事务所之间合并对审计定价的影响不如涉及"四大"的合并显著;此外,新设合并与吸收合并对审计定价的影响没有显著差异。     

Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia

In emerging markets, the agency conflicts between controlling owners and the minority shareholders are difficult to mitigate through conventional corporate control mechanisms such as boards of directors and takeovers. We examine whether external independent auditors are employed as monitors or as bonding mechanisms, or both, to alleviate the agency problems. Using a broad sample from eight East Asian economies, we document that firms with agency problems embedded in the ownership structures are more likely to employ Big 5 auditors. This relation is evident among firms that raise equity capital frequently. Consistently, firms hiring Big 5 auditors receive smaller share price discounts associated with the agency conflicts. Also, we find that Big 5 auditors take into consideration their clients' agency problems when making audit fee and audit report decisions. Taken together, these results suggest that Big 5 auditors do have a corporate governance role in emerging markets.     

What matters in audit pricing: industry specialization or overall market leadership?

Ferguson et al. (2003) report that audit industry fee premia primarily reside with joint national and city‐specific industry leadership as opposed to merely firm‐wide (national) industry expertise, suggesting auditor choice among the Big 5 is best conceptualized on joint industry specialization in city‐specific markets and nationally. The present study examines whether the prior results could be confounded by the presence of city‐specific overall market leadership effects. Our findings reaffirm that joint local and national auditor industry expertise is valued by audit clients. Furthermore, overall city‐specific leadership, by itself, also matters in fee determination and results in higher fees, although at a slightly weaker level of statistical significance.     

Audit Firm Ranking,Audit Quality and Audit Fees: Examining Conflicting Price Discrimination Views

In this study, we examine whether highly ranked audit firms in Iran, as determined by the Securities and Exchange Organization (SEO), earn a fee premium, firstly, by providing superior quality audit services or, secondly, due to reputation created by the ranking system implemented by the SEO. We employ price discrimination theory, and we test quality discrimination versus brand reputation explanations in the context of a unique institutional setting (where international audit firms are not allowed to operate). The data are derived from firms listed on the Tehran Stock Exchange (TSE) for the period 2006 to 2015. Our results show that the quality of audit services (using all of our measures) provided by the highest ranked audit firms is not superior to that of the non-highest ranked firms. In addition, the audit fee models suggest that the highest ranked firms charge significantly more audit fees compared to lower ranked firms. We employ several sensitivity tests and the results do not change materially. Such findings go against the “quality-based price discrimination” view but support the reputation-based view, and make a significant contribution towards understanding the economic consequences of state-determined ranking of audit firms rather than allowing the market to determine quality differentiation.     

The Pricing of Audit Services: Further Evidence from the Canadian Market

Since the seminal work of Simunic (1980), many studies have investigated audit pricing, competition in the audit industry, product differentiation and audit cost functions. This study expands on the work done to date by examining Canadian audit fees across time, audit firm and industry. The observations of audit fee data span the period of time during which the provincial codes of professional ethics with respect to fee tenders and advertising in general were relaxing in Canada. The results reported in this study support the existence of differentiated audit services in the Canadian audit market, and are consistent with DeAngelo's (1981) size interpretation of audit quality. Although no significant differences in the pricing of audit services across time are detected, the data provide evidence of significant pricing differences across (pre-merger) Big Eight audit firms in the small auditee market, suggesting that treating these audit firms as a homogeneous group in future research may not be appropriate. These inter-firm pricing differences do not appear to be due to the potential confounding effects of the auditee's industry. In contrast to previous studies, a significant positive association between internal and external audit costs is observed, suggesting a complementary, rather than a substitute, relationship.