The effects of auditor change on audit fees: tests of price cutting and price recovery

Article Abstract:

Concern was expressed by the Commission on Auditors' Responsibilities about the negative effect of audit fee price cuts on the independence of auditors. Tests were conducted here to assess both the presence and degree of audit fee price cutting on 1984 audit fees. The sample consisted of 214 companies that changed auditors from 1979-1984. A control sample was also studied, consisting of 226 companies that did not change auditors during the same time period. Results revealed a substantial fee cut in the initial engagement year averaging 24% of normal fee levels for ongoing arrangements. There was also a 15% average fee cut for each of the following two years, but the audit fee tended to increase to normal levels by the fourth year for continuing arrangements. Reconsideration of the Commission's concern abut price cutting's effect on auditor independence is offered in light of the research findings.

Analysis

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Pricing initial audit engagements: a test of competing theories

Article Abstract:

A study investigated pricing of initial engagement audits in Australia to empirically examine two competing models. DeAngelo (1981) anticipates initial engagement discounts in all situations while Dye (1991) posits that discounts will not take place in settings where audits are publicly disclosed. This analysis appraises initial engagement pricing in 224 initial engagements in Australia, where public disclosure of audit fees has been practiced since the 1970s. Results found no significant discounts for three of four different types of initial audit engagements. Discounts were not found for those initial engagements from within Big Eight auditor changes, within non-Big Eight auditor changes and changes from Big Eight to non-Big Eight auditors. Discounts were found only for initial engagements arising from changes from a non-Big Eight to Big Eight auditor. These findings support Dye's model.

Accounting, auditing, & bookkeeping, Accounting & Auditing Services, Accounting, Tax Preparation, Bookkeeping, and Payroll Services, Research, Models, Discounts (Sales)

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A test of audit pricing in the small-client segment of the U.S. audit market

Article Abstract:

Simunic in 1980 and Palmrose in 1986 report contradictory findings about a price premium offered by a Big Eight auditor in the 'small' auditee segment of the US market for publicly-trade firms. It is suggested that a Big Eight price premium is in place and that the premium functions with respect to both local-regional companies and second-tier national firms. The fact that a price premium exists suggests Big Eight product differentiation, at least in the 'small' auditee market quadrant. A separate examination is made of initial audit engagements. Results suggest that initial engagements are priced substantially lower than continuing ones. This supports research price-cutting behavior reports, but no inference is offered about the effect of price-cutting on the quality of audits.

Accounting and auditing, Small business, Pricing

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