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

Abstract

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.

Audit pricing following mergers of accounting practices: evidence from Hong Kong

“…These models, and others (e.g. Simunic, 1980;Simon and Francis, 1988;Pong and Whittington, 1994;Gregory and Collier, 1996;McMeeking et al, 2003a;Peel and Roberts, 2003), have demonstrated relatively high explanatory power and have been robust across different samples, time periods, and countries, and to sensitivity analysis for model misspecification. Although Pong and Whittington ( 1994) argue that many audit fee models used in prior research are mis-specified, this seems to have had relatively little impact on the explanatory power and predictive power of the models."'…”

“…Model specification is very important in audit fee studies (Pong and Whittington, 1994;McMeeking et al, 2003b;Peel and Roberts, 2003). Accordingly, we run a number of alternative models to examine how robust our main results are.17 Pong andWhittington (1994: 1075) advocate a quadratic model where sales, assets, and their squared terms appear.…”

Motivating Capital Investment by Using the Audit Process to Increase Financial Transparency

“…Hay and Davis (2002) find that firms seeking higher quality audits do so for signaling reasons. Peel and Roberts (2003) find that small firms willingly hire higher priced audit firms to send signals of operations and earnings quality to investors. Danielson et al, (2009), suggest that because REITs can derive benefits from hiring high quality auditors, doing so to convey financial transparency can be an important aspect of REITs' capital structure mechanisms.…”

Large Sample Evidence of the Determinants of Nonprofit Monitoring Costs: A Resource Dependence Framework

“…9 Determinants studied range from the adoption of International Financial Reporting Standards (Kim, Liu, and Zheng 2012;De George, Ferguson, and Spear 2013) to social capital (Jha and Chen 2015), and they use samples that span U.S. and international firms, industries, and various client sizes (e.g., Peel and Roberts [2003] and Francis and Simon [1987] study audit fees among smaller clients). Although to a lesser degree, audit fees among government organizations have also been studied, with some results consistent with the for-profit audit fee literature.…”