Auditor Industry Specialization, Client Bargaining Power, and Audit Fees: Further Evidence

Abstract

Casterella, Francis, Lewis, and Walker (CFLW 2004) find, using survey data from 1993, that (1) there is a Big 6 industry specialization audit fee premium in the small client segment of the U.S. audit market, but (2) audit fees decrease for large companies as the client becomes increasingly large relative to an auditor's clientele. In this study, we first replicate and confirm the results of CFLW (2004), using audit fee data from SEC filings for fiscal 2000 and 2001. In the post-SOX period, we find that the results related to specialization continue to hold in fiscal 2004 but not in 2003—suggesting that 2003 is perhaps a unique year due to the flux in the audit market following the enactment of SOX. With respect to client bargaining power, our results in the post-SOX period differ from CFLW (2004) in that we observe a negative association between client bargaining power and audit fees for both the small and large client segments.

Determinants of Audit Fees: Evidence from an Emerging Economy

“…In return, big international audit firms are more likely to provide assurance to stockholders and reduce agency costs. Consequently, the reputation and status of audit firm can have a great effect on audit fees (Huang et al, 2007;Vermeer et al, 2009;Choi et al, 2010;Verbruggen et al, 2011;Wang et al, 2011;El-Gammal, 2012). In this respect, Hay et al, (2006) argued that higher audit fees are expected when an auditor is recognized to be of superior quality to other firms.…”

Lower audit fees for women audit partners in Taiwan and why

“…The prior literature suggests an audit fee discount for an initial audit engagement Simon & Francis, 1988;Whisenant, Sankaraguruswamy, & Raghunandan, 2003), so we include an indicator of initial audit engagement (INITIAL) and control for the number of new audit partners engaged (NEWCPA). Similar to Huang, Liu, Raghunandan, andRama (2007, 2009) and Chen, Sun, and Wu (2010), we include the logarithm of non-audit fees (LNNAF), the ratio of the audited client's total assets over the sum of the total assets of all the audit firm's clients (CIFIRM), the ratio of the audited client's total assets over the sum of the total assets of all the leading audit partner's clients (CICPA1) and the accompanying audit partner's clients (CICPA2), the number of years of audit firm tenure since 1983 (AFTENURE), and the number of continuous years that the leading audit partner and the accompanying audit partner have been engaged with the client (CPA1TE-NURE and CPA2TENURE) to capture client importance and the client-auditor relationship. We also control for audit firm's and auditor's industry specialization (EXPERT_FIRM, EXPERT_CPA1 and EXPERT_CPA2) given the audit fees premiums for industry specialized documented in the prior literature (Francis, Reichelt, & Wang, 2005;Zerni, 2012).…”

Attributes of audit quality and weak fiscal sustainability countries

“…The coefficient of this variable is expected to be negative, as it acts as a liquidity measure that in high levels mitigates financial risk and subsequently the potential of a modified audit opinion. ZSCORE is included, since prior literature positively relates a firm's financial distress, (measured with the probability of bankruptcy) to audit qualifications (Huang et al, 2007;Carey and Simnett, 2006;RuizBarbadillo et al, 2009;Chi and Chin, 2011). As an added indication for potential financial distress and increased probability for bankruptcy, this study also includes as proxy for audit opinion, cash flow from operations (CFO), (Dopuch et al, 1987;Johnstone and Bedard, 2004;Choi et al, 2004;Hogan and Martin, 2009;Cassell et al, 2012).…”