Audit fee premiums from brand name, industry specialization and industry leadership: A study of the post Big 6 merger in Malaysia

This study examines the association between measures of earnings quality and auditor industry specialization. Prior work has examined the association between auditor brand name and earnings quality, using auditor brand name to proxy for audit quality. Recent work has hypothesized that auditor industry specialization also contributes to audit quality. Extending this literature, we compare the absolute level of discretionary accruals (DAC) and earnings response coefficients (ERC) of firms audited by industry specialists with those of firms not audited by industry specialists. We restrict our study to clients of Big 6 (and later Big 5) auditors to control for brand name. Because industry specialization is unobservable, we use multiple proxies for it. After controlling for variables established in prior work to be related to DAC and the ERC, we find clients of industry specialist auditors have lower DAC and higher ERC than clients of nonspecialist auditors. This finding is consistent with clients of industry specialists having higher earnings quality than clients of nonspecialists.

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Long-Term Trends in Audit Fees

Auditing A Journal of Practice & Theory ◽

10.2308/aud.2001.20.1.115 ◽

2001 ◽

Vol 20 (1) ◽

pp. 115-136 ◽

Cited By ~ 77

Author(s):

Krishnagopal Menon ◽

David D. Williams

Keyword(s):

Audit Fees ◽

Accounting Firms ◽

Industry Specialization ◽

Expectation Gap ◽

Long Term Effect ◽

Audit Fee ◽

Model Coefficient ◽

Long Term Trends ◽

Wage Increases

The audit fees literature contains little by way of systematic evidence on long-term trends in audit fees. This study analyzes trends in audit fees from 1980 through 1997, adjusting for changes in client size, complexity, and risk. The sample is restricted to clients of Big 6 firms that voluntarily disclosed audit fees in the period 1980–1997. Evidence is found that audit fees increased in the 1980s but stayed flat in the 1990s. Most important, a significant increase is noted in 1988, the year in which the Auditing Standards Board issued the “expectation gap” standards. These results hold even after controlling for wage increases in accounting firms, suggesting an expansion of auditing effort. There is no evidence that auditors obtain any price premium from industry specialization. The 1989 Big 8 mergers appear to have had a short-term, but not long-term, effect on fees. Finally, the magnitude of the audit fee model coefficient for accounts receivable and inventory has declined over the period, presumably due to productivity improvements.

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Discussion of "Brand Name Audit Pricing, Industry Specialization, and Leadership Premiums post-Big 8 and Big 6 Mergers"

Contemporary Accounting Research ◽

10.1506/30f8-3mch-wv7b-2cgv ◽

2002 ◽

Vol 19 (1) ◽

pp. 111-116 ◽

Cited By ~ 18

Author(s):

MICHAEL WILLENBORG ◽

University of Connecticut

Keyword(s):

Brand Name ◽

Audit Pricing ◽

Industry Specialization

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Audit firms and industry specialization in an emerging economy

Journal of Accounting & Organizational Change ◽

10.1108/jaoc-03-2017-0024 ◽

2018 ◽

Vol 14 (3) ◽

pp. 338-362

Author(s):

Karim Hegazy ◽

Mohamed Hegazy

Keyword(s):

Financial Services ◽

Capital Investment ◽

Emerging Economy ◽

Annual Reports ◽

Brand Name ◽

Industry Specialization ◽

Content Type ◽

Audit Firm ◽

Big 4 ◽

Audit Firms

PurposeThis study aims to investigate the implications of audit industry specialization on auditor’s retention and growth within an emerging economy. Factors such as whether the firm is a Big 4, a firm with international affiliation, a local firm and the type of industry were studied to analyse the reasons behind audit firm retention and growth.Design/methodology/approachThis research is based on a field study related to audit firms providing services to listed companies in an emerging economy. The sample includes the top 100 publicly held companies’ in the Egyptian stock market during 2006-2011 for which their annual reports are analysed to determine the audit firms’ retention and growth. An assessment of the continuity of the auditors and the increase in the number of audit clients were also measured.FindingsThe results confirm that industry specialization has an important effect on the auditor’s retention, especially for industries where capital investment is significant such as buildings, construction, financial services, housing and real estate. Big 4 audit firms retained their clients because of their industry specialization and brand name. Evidence was found that good knowledge of accounting and auditing standards resulted in audit firms with international affiliation competing with the Big 4 for clients’ retention and growth.Originality/valueThis study contributes to the existing literature, as it is among the first to provide empirical evidence on auditor retention, growth and auditor’s dominance in an emerging economy such as Egypt.

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The effect of Legal Entity Identifiers on audit fee changes

Journal of Information Systems ◽

10.2308/isys-2020-056 ◽

2021 ◽

Author(s):

Ju-Chun Yen

Keyword(s):

Empirical Evidence ◽

Learning Effect ◽

Audit Fees ◽

Policy Implications ◽

Brand Name ◽

Legal Entity ◽

Audit Firms ◽

Audit Fee ◽

Legal Entities ◽

Industry Expertise

This study investigates whether a client's use of a Legal Entity Identifier (LEI) is associated with audit fee changes. An LEI uniquely identifies different legal entities worldwide, making audit clients' transactions and related parties more transparent and traceable, potentially reducing auditors' costs and audit risks, as reflected in audit fee changes. Using a sample of U.S. firms, I find that audit fees increase more for LEI firms than for non-LEI firms within the first few years of LEI registration, but they increase less for LEI firms than for non-LEI firms afterward. The results support a reduction in audit costs due to LEIs, with a learning effect. I also find that audit firms' brand name and industry expertise strengthen this association. This study provides initial empirical evidence of the effects of LEI and policy implications.

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Industry Specialization by Global Audit Firm Networks

The Accounting Review ◽

10.2308/accr.2009.84.2.355 ◽

2009 ◽

Vol 84 (2) ◽

pp. 355-382 ◽

Cited By ~ 142

Author(s):

Elizabeth Carson

Keyword(s):

Market Share ◽

Industry Specialization ◽

Audit Firm ◽

Global Industry ◽

Audit Market ◽

Audit Firms ◽

Audit Fee ◽

Firm Networks ◽

National Industry

ABSTRACT: This study investigates the role of global audit firm networks in the market for audit services. Underlying theory suggests that there are benefits from the use of network structures, which enable these firms to expand efficiently into the global audit market and to develop global industry specializations. I identify global and national industry specialist auditors via market share metrics based on client assets audited, and use a large sample of 15,583 clients from 62 countries in 2000 and 14,628 clients from 60 countries in 2004. I find in both periods that audit fee premiums are consistently associated with global specialist auditors, irrespective of whether those audit firms are or are not national specialists.

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Effect of Client Reputation on Audit Fees at the Office Level: An Examination of S&P 500 Index Membership

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50572 ◽

2013 ◽

Vol 33 (1) ◽

pp. 1-27 ◽

Cited By ~ 8

Author(s):

Sharad C. Asthana ◽

Rachana Kalelkar

Keyword(s):

Stock Prices ◽

Reporting Quality ◽

Audit Fees ◽

Brand Name ◽

Rent Extraction ◽

Auditor Switching ◽

Market Shares ◽

Audit Fee ◽

Office Level

SUMMARY Prior studies have examined the effect of a decline in the auditor's or client's reputation on auditor switching, market shares, and stock prices. We extend these studies by examining the effect of an unexpected increase in a client's reputation on audit fees at the office level. We argue that association with a reputed client will enhance the auditor's reputation and establish a brand name, thus enabling the auditor to charge higher fees from other clients. Using a client's inclusion into the prestigious S&P 500 index as a proxy for the client's change in reputation, we find that the audit fees are discounted for this S&P client when it enters the index. The audit fee for this client increases following its exit from the index. We posit that changes in the audit fees for the S&P 500 clients are attributable to the changes in the reporting quality of these firms following their entry to and exit from the index. We also find increases in the audit fees of non-S&P clients of the audit office around such events. We argue that the presence of S&P clients helps auditors differentiate themselves from other auditors and allows them to extract rents from non-S&P clients. Last, we find no evidence of improvement in the reporting quality of other non-S&P clients, supporting our rent-extraction story.

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