Does Regulating Audit Pricing
Enhance Audit Quality and the
Timeliness of Audit Reporting? The
Texas Experience

ABSTRACT What are the implications of major customer dependency, i.e., the degree of a supplier firm's dependency on its major customers, for external auditors? While the conventional view emphasizes the negatives of major customer dependency for client business risk, we find that suppliers with more concentrated customer bases spend less on audit fees. The evidence is consistent with reduced audit effort due to efficiency gains in the audit process, especially when suppliers with more concentrated customer bases share the same auditors with their long-standing major customers. The audit fee discount we identify does not imply that audit quality declines with customer-base concentration. In fact, we find that suppliers with more concentrated customer bases are less likely to experience material restatements of previously audited financial statements. Taking the external auditors' perspective, our study provides new managerial insights on the costs and benefits of major customer relationships for supplier firms. Data Availability: All data are available from sources identified in the text.

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Audit Market Structure and Audit Pricing

Accounting Horizons ◽

10.2308/acch-51603 ◽

2016 ◽

Vol 31 (1) ◽

pp. 57-81 ◽

Cited By ~ 18

Author(s):

John Daniel Eshleman ◽

Bradley P. Lawson

Keyword(s):

Fixed Effects ◽

Audit Quality ◽

Audit Fees ◽

Market Concentration ◽

First Year ◽

Audit Pricing ◽

Ongoing Debate ◽

Audit Market ◽

Big 4 ◽

The U.S

SYNOPSIS Extant literature finds mixed evidence on the association between audit market concentration and audit fees. We re-examine this issue using a large sample of U.S. audit clients covering 90 metropolitan statistical areas (MSAs) spanning 2000–2013. We find that audit market concentration is associated with significantly higher audit fees, consistent with the concerns of regulators and managers. We also find that increases in audit market concentration are associated with fewer initial engagement fee discounts (i.e., reduced lowballing), particularly for non-Big 4 clients. We reconcile our findings with those of prior research and find that our divergent findings are attributable to controls for MSA fixed effects. In supplemental analyses, we find that audit market concentration is associated with higher audit quality. We also find that concentration is associated with higher audit quality for first-year engagements, but only if the auditor does not lowball on the engagement. Our results are relevant to the ongoing debate regarding the consequences of increased concentration within the U.S. audit market (GAO 2003, 2008). JEL Classifications: M41; M42; L13.

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Auditor Locality, Audit Quality and Audit Pricing

SSRN Electronic Journal ◽

10.2139/ssrn.966022 ◽

2008 ◽

Cited By ~ 12

Author(s):

Jong-Hag Choi ◽

Jeong-Bon Kim ◽

Aini Qiu ◽

Yoonseok Zang

Keyword(s):

Audit Quality ◽

Audit Pricing

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The effect of audit market structure on audit quality and audit pricing in the private‐client market

Journal of Business Finance &amp Accounting ◽

10.1111/jbfa.12414 ◽

2019 ◽

Vol 47 (3-4) ◽

pp. 456-488 ◽

Cited By ~ 1

Author(s):

Jeroen Raak ◽

Erik Peek ◽

Roger Meuwissen ◽

Caren Schelleman

Keyword(s):

Market Structure ◽

Audit Quality ◽

Audit Pricing ◽

Audit Market

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Audit Office Size, Audit Quality, and Audit Pricing

Auditing A Journal of Practice & Theory ◽

10.2308/aud.2010.29.1.73 ◽

2010 ◽

Vol 29 (1) ◽

pp. 73-97 ◽

Cited By ~ 223

Author(s):

Jong-Hag Choi ◽

Chansog (Francis) Kim ◽

Jeong-Bon Kim ◽

Yoonseok Zang

Keyword(s):

Firm Size ◽

Audit Quality ◽

National Level ◽

Audit Fees ◽

Specific Factor ◽

Audit Pricing ◽

Audit Firm ◽

Industry Leadership ◽

Office Size ◽

Office Level

SUMMARY: Using a large sample of U.S. audit client firms over the period 2000–2005, this paper investigates whether and how the size of a local practice office within an audit firm (hereafter, office size) is a significant, engagement-specific factor determining audit quality and audit fees over and beyond audit firm size at the national level and auditor industry leadership at the city or office level. For our empirical tests, audit quality is measured by unsigned abnormal accruals, and the office size is measured in two different ways: one based on the number of audit clients in each office and the other based on a total of audit fees earned by each office. Our results show that the office size has significantly positive relations with both audit quality and audit fees, even after controlling for national-level audit firm size and office-level industry expertise. These positive relations support the view that large local offices provide higher-quality audits compared with small local offices, and that such quality differences are priced in the market for audit services.

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The Influence of Private Clients on Office Level Audit Quality and Audit Pricing in the U.S.

10.26226/morressier.5f0c7d3058e581e69b05cfa2 ◽

2020 ◽

Author(s):

Mike Truelson

Keyword(s):

Audit Quality ◽

Audit Pricing ◽

Office Level ◽

The U.S

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Client-Auditor Supply Chain Relationships, Audit Quality, and Audit Pricing

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50783 ◽

2014 ◽

Vol 33 (4) ◽

pp. 119-166 ◽

Cited By ~ 25

Author(s):

Karla M. Johnstone ◽

Chan Li ◽

Shuqing Luo

Keyword(s):

Supply Chain ◽

Audit Quality ◽

National Level ◽

Audit Fees ◽

Audit Pricing ◽

Industry Specialization ◽

Supply Chain Relationships ◽

Revenue Cycle ◽

The City

SUMMARY: We investigate the association between auditors' supply chain knowledge and companies' audit quality and audit pricing. Auditor supply chain knowledge is a specialized understanding of information and processes regarding accounting and auditing issues that relates to both a supplier and its major customer, regardless of industry commonalities, that is particularly useful for understanding complexities associated with the revenue cycle. We find that auditors' supply chain knowledge at the city level is associated with higher audit quality and lower audit fees, compared to companies employing auditors with supply chain knowledge at the national level or employing auditors without supply chain knowledge. Such effects are stronger for supplier companies that derive a high proportion of revenue from their major customers, and when the revenue cycle for the supplier companies is more important. We obtain these results while controlling for the usual determinants of audit quality and fees, along with auditors' industry specialization.

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