Determinants of Audit Fees: Evidence from a Small Capital Market with a Joint Audit Requirement

Abstract

This paper examines audit fees paid by all 126 non-financial companies listed on the Copenhagen Stock Exchange in 2002.The Danish institutional setting is theoretically interesting because listed companies are required to use two independent auditors, and the liberal regulation of auditor independence facilitates an examination of the association between consultancy fees and audit fees. Our results indicate that de facto joint audits, where both auditors have significant stakes in the audit, reduce audit fees compared with audits where one auditor is dominant, albeit only for larger companies. We attribute these results to competition between the auditors. Our results clearly confirm previous findings of a positive association between other fees and audit fees. On balance, we find the core audit fee determinants model to be well specified for the Danish data, although small companies seem to differ somewhat from large companies. Finally, we find no additional Big Four effect from the appointment of a second Big Four auditor. However, our results indicate that the use of PWC is associated with lower audit fees in large companies and higher audit fees in small companies.

Joint Audit: Issues and Challenges for Researchers and Policy-Makers

“…In contrast to the findings from Denmark (Thinggaard and Kiertzner, 2008), Gonthier-Besacier and Schatt (2007) show that balanced allocation between the auditors does not affect audit fees in France. They also show that companies audited by two Big 4 audit firms have a lower audit fee-size ratio compared to companies audited by other types of auditor pairs.…”

“…In the Danish setting, a negative association between the 'de facto' joint audit (a balanced audit fee allocation between both auditors) and audit fees can be documented for the large-client segment of the audit market (Thinggaard and Kiertzner, 2008). In contrast to the findings from Denmark (Thinggaard and Kiertzner, 2008), Gonthier-Besacier and Schatt (2007) show that balanced allocation between the auditors does not affect audit fees in France.…”

“…Furthermore, a balanced share of the audit effort seems desirable in a joint audit setting, because unbalanced situations with a 'dominant' auditor are perceived as non-effective joint audits (Bennecib, 2004;Le Maux, 2004;Thinggaard and Kiertzner, 2008). However, even though the French auditors' code of professional conduct requires that the audit work be shared in a balanced way (qualitatively and quantitatively), a recent report of the French Autorité des Marchés Financiers (The Autorité des Marchés Financiers (AMF) is an independent public body with legal personality and financial autonomy) showed cases with significantly imbalanced fee distribution between the two joint auditors (AMF, 2011).…”

“…Danish law did not specify how the audit work or audit fees were to be shared between the two auditors, often resulting in cases in which one audit firm would bill more than 80 per cent of the audit fees (Thinggaard and Kiertzner, 2008).…”

Determinants of Audit Fees: Evidence from an Emerging Economy

“…Companies with several subsidiaries are considered to be more complex than companies with few or without subsidiaries. A significant proportion of previous studies observed positive relationship between corporate complexity and audit fees (Simunic, 1980;Brinn et al, 1994;Cameran, 2005;Joshi & Bastaki, 2000;Clatworthy & Peel, 2006;Thinggaard & Kiertzner, 2008;Vermeer et al, 2009;Ellis & Booker, 2011;Verbruggen et al, 2011). The main reasons advanced in the literature to explain such a relationship is that greater number of subordinate financial statements require more audit time and greater expertise to ensure the accuracy of the consolidated financial statements (Sandra & Patrick, 1996).…”