Determinants of Audit Fees for Quoted Uk Companies

Abstract

This study reports further evidence as to the determinants of the audit fees paid by quoted companies in the UK. It outlines a framework based on the findings from semi‐structured interviews with partners in four large audit firms and the results of previous research, and tests this framework by means of multivariate analysis using 1987 data for a large sample of quoted UK companies. A model explaining 87 per cent of the variation in audit fees is constructed. The principal explanatory variables are found to be auditee size, return on shareholders equity, the number of subsidiaries, the lag between the year end and the date of the audit report, the size of the auditor, a measure of auditee diversification, the ownership structure of the auditee, and whether the auditor was based in London, with the last three being new variables introduced in this study.

The Determinants of Audit Fees - Evidence from the Voluntary Sector

“…An appropriate comparison can be made with prior studies on smaller private sector companies, since all but a small number of charities would be classified as small in the UK private sector. Thus, our R 2 of 62% is in line with previous studies on smaller companies (e.g., 55% by Brinn et al, 1994; 62% for the small-firm sub-sample in Chan et al, 1993) but is lower than reported in large company models (e.g., 87% by Chan et al, 1993). This explanatory power compares favourably with that obtained in other studies that seek to develop audit fee models in niche markets (for example, Cullinan (1997) obtains an R 2 of 0.39 for the US pension plan market).…”

“…It is expected that this would lead to an increased audit fee either because additional audit work is required, or to reflect an element of insurance premium to compensate the auditor for the additional risk. Positive coefficients on proxies for these two variables have been found in previous studies of private sector firms (e.g., for audit delay: Chan et al, 1993;Ezzamel et al, 1996). However, in charity audits, there is usually less pressure to complete the audit within a short period after the accounting year-end.…”

“…For quoted companies, Chan et al (1993) found a premium of 36.7%, Ezzamel et al (1996), 23.5%, and for independent unquoted firms Brinn et al (1994) found a 28.0% premium. By contrast, neither Che-Ahmad and Houghton (1996), in their study of medium-sized UK companies, nor Clatworthy et al (2000) in their study of UK National Health Service Trusts found any evidence of a large audit firm premium.…”

“…The impact of NAS provision has been the focus of several studies including Simunic (1984), Palmrose (1986b), Parkash and Venable (1993) and Davis, Ricchiute and Trompeter (1993) in the US; Ezzamel, Gwilliam andHolland (1996, 1997) in the UK; Barkess and Simnett (1994) in Australia;and Firth (1997) in Norway. These studies generally show a positive relation between audit and non-audit fees 10 , which is interpreted by some authors as due to knowledge spillover effects and/or audit production efficiencies and a price-elastic demand for audit services.…”

“…Thus, it is expected that larger charities will generally be associated with larger audit fees. In private sector studies, auditee size has often been proxied by company total assets (e.g., Taylor and Baker, 1981;Brinn et al, 1994;Firth, 1997) and occasionally by total sales (e.g., Haskins and Williams, 1988;Chan et al, 1993). In public sector studies of local government audits, population has been used as the size proxy (e.g., Rubin, 1988;Baber et al, 1987).…”