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.