Audit Fees for Initial Audit Engagements Before and After SOX

Abstract

SUMMARY: Legislators, regulators, and the media have expressed concerns that auditors “lowball” the fees for initial-year audits and that such fee discounts can lead to reduced audit quality. We hypothesize that initial-year audit fee discounts will be less likely in the post-SOX period than in the pre-SOX period. Using both fee-levels and fee-changes models, we find that Big 4 clients receive initial-year audit fee discounts of about 24 percent in 2001; this finding is consistent with results from many prior studies that have examined various periods prior to SOX. However, we find that in 2005–2006 Big 4 clients pay an initial-year audit fee premium of around 16 percent. We also document that the Big 4 are much less likely to serve as a successor, following an auditor change, in 2005–2006 than in 2001. Overall, the findings suggest that concerns about initial-year audit fee discounts are not supported by empirical evidence in the post-SOX period. The results also suggest that the Big 4 have become more conservative in the post-SOX period with respect to client acceptance and pricing decisions.

Lower audit fees for women audit partners in Taiwan and why

“…Second, we follow prior audit pricing studies (e.g., Huang, Raghunandan, & Rama, 2009;Kim, Liu, & Zheng, 2012;Dao, Raghunandan, & Rama, 2012;Fung, Gul, & Krishnan, 2012) to construct the audit pricing regression model as follows:…”

Perceptions of preparers, users and auditors regarding financial statement audits conducted by Big 4 accounting firms

“…In fact, almost all of the studies mentioned in the literature review either use archival data -in many cases publicly available data -(for example, Krishnan, 2003 ;Francis et al , 2005 ;Knechel et al , 2007 ;Krishnan et al , 2008 ;Huang et al , 2009 ) or use experiments to test hypotheses. In the experimental settings, the subjects are typically auditors (for example, Solomon et al , 1999 ).…”

“…Consistent with these explanations, the results of recent (post-SOX) literature show that second-tier auditors have become more conservative in the sense that, although in the pre-SOX period they tolerated earnings management to a greater extent by clients that switched from a Big 4 auditor, in the post-SOX period they are associated with lower earnings management ( Krishnan et al , 2008 ). The fi ndings of Huang et al (2009) , however, suggest that Big 4 fi rms have also become more conservative in the post-SOX period with respect to both their new client acceptance and their pricing decisions (for example, the Big 4 fi rms are much less likely to serve as a successor following a client ' s dismissal of the predecessor in the post-SOX period than in the pre-SOX period, and they now earn an initial fee premium instead of the initial fee discount observed in the pre-SOX period).…”

“…One CFO put it rather bluntly when he said that if you are a small company planning on going public and you call any of the Big 4 accounting fi rms asking for a proposal to conduct an audit, you will be waiting a long time for them to return your phone call. In fact, regarding the Big 4 fi rm perspective, post-SOX literature shows that Big 4 fi rms are much less likely to serve as a successor following a client ' s dismissal of the predecessor in the post-SOX period than in the pre-SOX period, suggesting that Big 4 fi rms have become more conservative with respect to their new clients ' acceptance ( Huang et al , 2009 ). Therefore, the clients ' acceptance of the Big 4 accounting fi rms has changed over time.…”

The effect of real earnings management on audit fees in listed companies in Tehran Stock Exchange

“…He reported that the level of audit fees could increase in client firms' size, operation complexity, and inherent audit risk because more quantity of resources utilized by the auditor in performing the audit examination would be needed and auditors were exposed to larger possible litigation risks when auditing become more complex. After controlling these three groups of fee determinants, subsequent studies explored additional audit fee determinants including auditor size, non-audit services, auditor change, auditor change direction, auditor brand name and industry specialization, client satisfaction, client risks, client bargaining power, audit committee characteristics, internal control quality, SOX passage, crosslisting and country's legal regimes, education requirement for new accountants, and audit market competition (Sohn, 2011;Palmrose 1986aPalmrose , 1986bFrancis & Simon 1987;Simon & Francis 1988;Craswell et al, 1995;Behn et al, 1999;Craswell & Francis, 1999;Johnstone & Bedard, 2001;Whisenant et al, 2003;Abbott et al, 2003;Ashbaugh et al, 2003;Chaney et al, 2004;Hay et al, 2006, Huang et al, 2007Hogan & Wilkins, 2008;Huang et al, 2009;Choi et al, 2009;Allen & Woodland, 2010, Hay & Knechel 2010Fudenberg & Tirole, 1995;Hoitash et al, 2008).…”