Big 4 audit fee premiums for national‐ and city‐specific industry leadership in the UK: Additional evidence

Abstract

This study investigates the relationship between Big 4 auditor industry specialization and audit pricing in the UK in a period of many changes having taken place in the market for audit services. Using a large dataset between 2004 and 2011, our empirical results show a significantly higher fee premium for the Big 4 firms who are national industry leaders compared to city‐specific industry leaders, and that the fee premium for industry leadership is only earned by the city‐specific industry leaders if and when they are also the national leaders. Neither the national nor city level industry leadership alone is priced anymore in the UK audit market. These findings hold for the pre‐ and the post‐global‐financial‐crisis period only and for a number of additional analyses. The evidence suggests that the Big 4 industry leadership in the UK has moved away from the previously documented premium for the Big 4 city‐specific industry leadership alone, and is now driven solely by the joint Big 4 industry expertise at the national and city‐specific levels concurrently. The study's results indicate that there is a progression from city‐specific industry expertise to national‐specific industry expertise, and they imply that there has been an improvement in the sharing and transferability of industry knowledge and expertise among the city offices of the Big 4 firms in the UK in the period of investigation.

Partner industry specialization and audit pricing in the United Kingdom

“…While it is evident that a partner's industry specialization plays an important role in audit quality in the US (Nagy, 2014), Sweden (Zerni, 2012), Australia (Goodwin & Wu, 2014), and Taiwan (Chin & Chi, 2009), the extent to which partner industry expertise contributes to higher audit quality still remains an unanswered empirical question in the UK audit market. Previous studies in the UK showed that city-industry specialization was important, but not national specialization (Basioudis & Francis, 2007), and later that both national and industry level specialization was needed in order to earn an audit fee premium (Mohd Kharuddin & Basioudis, 2018). Thus, this study examines whether industry expertise at the partner level is independently associated with audit pricing.…”

“…specialization from the city level (Basioudis & Francis, 2007) to the national level (Mohd Kharuddin & Basioudis, 2018).…”

“…Many studies report a positive relationship between auditor industry (national) specialization and audit fees (Ferguson et al, 2003;Mayhew & Wilkins, 2003;Francis et al, 2005;Carson, 2009;Cahan, Jeter, & Naiker, 2011;Fung, Gul, & Krishnan, 2012;Mohd Kharuddin & Basioudis, 2018), but many others provide somewhat different conclusions. For example, other studies provide weak results or insignificant findings (Palmrose, 1986;Pearson & Trompeter, 1994;Ferguson & Stokes, 2002;Ferguson et al, 2006;Basioudis & Francis, 2007), contrary evidence (Minutti-Meza, 2013), or a fee discount for non-specialists (Ettredge & Greenberg, 1990;Hay & Jeter, 2011).…”

“…These studies examine whether national (firm level) reputations or city reputations (office level) for industry expertise are more valued and more highly priced in the audit market (Ferguson et al, 2003;Francis et al, 2005;Basioudis & Francis, 2007;Hay & Jeter, 2011;Mohd Kharuddin & Basioudis, 2018). Whether the audit pricing is dominated by firm level or office level industry expertise might…”

Female Audit Partners and Extended Audit Reporting: UK Evidence

“…This change exposes auditors to greater accountability and tempts legitimacy issues that may affect their reputation (Brasel et al 2016;Gimbar et al 2016;Kachelmeier et al 2014). In response, audit firms may change their norms and working patterns (Kharuddin and Basioudis 2018;Srinidhi and Gul 2007). However, such increased demand on auditors has not yet brought commensurate concern for individual practitioners and their characteristics.…”