Big 4 Audit Fee Premiums for National and Office-Level Industry Leadership in the United Kingdom

2007 ◽  
Vol 26 (2) ◽  
pp. 143-166 ◽  
Author(s):  
Ilias G. Basioudis ◽  
Jere R. Francis
Keyword(s):  
United Kingdom ◽  
Listed Companies ◽  
Accounting Firms ◽  
The United Kingdom ◽  
Big 4 ◽  
Industry Leadership ◽  
Audit Fee ◽  
Second Tier ◽  
Office Level

The pricing of Big 4 industry leadership is examined for a sample of U.K. publicly-listed companies, and adds to the evidence from the Australian and U.S. audit markets that city-specific industry leadership commands a fee premium. There is a significant fee premium for city-specific industry leaders relative to other Big 4 auditors, but no evidence that either the top-ranked or second-ranked firm nationally commands a fee premium relative to other Big 4 auditors, after controlling for city-level industry leadership. We also test for Big 4 fee premiums relative to non-Big 4 auditors and the U.K. data suggest a three-level hierarchy based on audit fee differentials: (1) Big 4 city-specific industry leaders have the largest fees; (2) other Big 4 auditors (noncity leaders) and second-tier national firms have comparable fees that are lower than Big 4 city leaders but larger than third-tier firms; and (3) third-tier accounting firms have the lowest fees.

PCAOB Inspections and Large Accounting Firms

2011 ◽  
Vol 26 (1) ◽  
pp. 43-63 ◽  
Author(s):  
Bryan K. Church ◽  
Lori B. Shefchik
Keyword(s):  
Audit Quality ◽  
Linear Trend ◽  
Dominant Role ◽  
Data Availability ◽  
Financial Statement ◽  
Public Companies ◽  
Accounting Firms ◽  
Big 4 ◽  
Second Tier ◽  
Over Time

SYNOPSIS The purpose of this paper is to analyze the PCAOB's inspection reports of large, annually inspected accounting firms. The inspection reports identify audit deficiencies that have implications for audit quality. By examining the inspection reports in detail, we can identify the nature and severity of audit deficiencies; we can track the total number of deficiencies over time; and we can pinpoint common, recurring audit deficiencies. We focus on large accounting firms because they play a dominant role in the marketplace (i.e., they audit public companies that comprise approximately 99 percent of U.S.-based issuer market capitalization). We document a significant, downward linear trend in the number of deficiencies from 2004 to 2009. We also identify common, recurring audit deficiencies, determine the financial statement accounts most often impacted by audit deficiencies, and isolate the primary emphasis of the financial statement impacted. Our findings generally are consistent comparing Big 4 and second-tier accounting firms, though a few differences emerge. In addition, we make comparisons with findings that have been documented for small, triennially inspected firms. Data Availability: The data are available from public sources.

Market Reaction to Auditor Switching from Big 4 to Third-Tier Small Accounting Firms

2010 ◽  
Vol 29 (2) ◽  
pp. 83-114 ◽  
Author(s):  
Hsihui Chang ◽  
C. S. Agnes Cheng ◽  
Kenneth J. Reichelt
Keyword(s):  
Stock Market ◽  
Audit Quality ◽  
Market Reaction ◽  
Accounting Firms ◽  
Auditor Switching ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Period 2 ◽  
Prior Literature ◽  
Second Tier

SUMMARY: After the demise of Arthur Andersen, the public accounting industry has witnessed a significant migration of public clients to second-tier (Grant Thornton and BDO Seidman) and smaller third-tier accounting firms. While prior literature documents that smaller auditors are perceived by the stock market as an inferior substitute for a Big 4 auditor, this perception appears to have changed in recent years. In this paper, we analyze market responses to auditor switching from Big 4 to smaller accounting firms during 2002 to 2006. We break our sample period into two separate periods (Periods 1 and 2) based on when regulatory changes occurred. These changes included Sarbanes-Oxley (SOX) 404 implementation, Public Company Accounting Oversight Board (PCAOB) inspections, and a tightened Form 8-K filing deadline. We find a relatively more positive stock market reaction to clients switching from a Big 4 to a smaller third-tier auditor in Period 2. This relatively more positive reaction in Period 2 reflects companies seeking better services rather than a lower audit fee, when an audit quality drop is less likely. Overall, our results suggest that companies and investors have become more receptive to smaller accounting firms.

scholarly journals Big 4 audit fee premiums for national- and city-specific industry leadership in the UK: Additional evidence

2017 ◽  
Vol 22 (1) ◽  
pp. 65-82 ◽  
Author(s):  
Khairul Ayuni Mohd Kharuddin ◽  
Ilias G. Basioudis
Keyword(s):  
Big 4 ◽  
Industry Leadership ◽  
Audit Fee ◽  
The Uk

How do audit fees change? Effects of firm size and section 404(b) compliance

2019 ◽  
Vol 34 (4) ◽  
pp. 393-437
Author(s):  
Alexey Lyubimov
Keyword(s):  
Audit Fees ◽  
Section 404 ◽  
Content Type ◽  
Control Effectiveness ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Fee ◽  
Second Tier ◽  
Changes Over Time ◽  
Over Time

Purpose The purpose of this paper is to investigate the effect of the size of the audit firm and compliance with Section 404(b) on how audit fees change over time. Design/methodology/approach This study uses panel data and an OLS regression to examine the relationship between audit fee changes, firms’ size and Section 404(b) compliance. Findings Section 404(b)-compliant companies experience a larger change in audit fees if they are audited by Big 4 firms than second-tier firms. Second-tier audit firms increase the fees primarily for the companies which do not comply with Section 404(b). Practical implications Regulators have been concerned with the Big 4 fee premium for four decades. This study informs regulators that the Big 4 continue increasing their fees at a higher rate than second-tier firms for their Section 404(b)-compliant clients (even though recent research shows that second-tier firms have increased quality to match the Big 4). This suggests that the Big 4 fee premium increases for this subset of clients, adding to the regulatory concerns. Originality/value While prior research has established the existence of the Big 4 fee premium, little is known about how this premium changes over time. Prior research shows that audit fees increase when internal controls are weak; however, little is known about how Section 404(b) compliance (once control effectiveness is controlled) affects fee changes. This paper addresses these voids in research.

Original and Revised Auditor Fee Data

2011 ◽  
Vol 5 (1) ◽  
pp. A54-A69 ◽  
Author(s):  
Rebecca L. Rosner ◽  
Ariel Markelevich
Keyword(s):  
Audit Committee ◽  
Audit Fees ◽  
Securities And Exchange Commission ◽  
Accounting Firms ◽  
Reporting Requirements ◽  
Disclosure Requirements ◽  
Big 4 ◽  
Audit Fee ◽  
Nonaudit Services ◽  
Auditor Fees

SUMMARY: A significant number of companies report revised auditor fees (audit, nonaudit services, and total) in subsequent Securities and Exchange Commission (SEC) filings. We find that, on average, revised audit fees and total fees are significantly higher, and nonaudit services (NAS) fees are significantly lower than the originally reported fees. The occurrence of fee revisions decreases significantly after 2006 and does not appear to be concentrated in specific industries. In addition, we find that larger clients are more likely to report fee revisions, while clients of Big 4 auditors and clients that file late are less likely to report fee revisions. We also examine the magnitude of upward and downward fee revisions. The fee revisions likely result from the changes in the SEC's fee disclosure reporting requirements from 2001 to 2003, as well as ambiguity related to the new requirements. In addition, they also may stem from estimated billing by accounting firms prior to filing with the SEC, followed by more precise billing after the filing. Our objective is to alert managers and practitioners to the subtleties of the fee disclosure requirements relative to fees billed/paid, the disparity in fee reporting, and the necessity for reporting revised fees if appropriate. We advise audit committee members, analysts, researchers, and other users of audit fee data to use revised fee numbers and exercise caution when using originally reported fees, as they often are revised.

“Big 4 fee premium” and audit quality: latest evidence from UK listed companies

2013 ◽  
Vol 28 (8) ◽  
pp. 680-707 ◽  
Author(s):  
Domenico Campa
Keyword(s):  
Audit Quality ◽  
Listed Companies ◽  
Content Type ◽  
Audit Market ◽  
Big 4 ◽  
Audit Firms ◽  
House Of Lords ◽  
Audit Fee ◽  
Research Questions ◽  
The Uk

PurposeUsing the most recent observations (2005‐2011) from a sample of UK listed companies, This paper aims to investigate whether Big 4 audit firms exhibit a “fee premium” and, if this is the case, whether the premium is related to the delivery of a better audit service.Design/methodology/approachUnivariate tests, multivariate regressions and two methodologies that control for self‐selection bias are used to answer the proposed research questions. Data are collected from DataStream.FindingsFindings provide consistent evidence about the existence of an “audit fee premium” charged by Big 4 firms while they do not highlight any significant relationship between audit quality and type of auditor with respect to the audit quality proxies investigated.Research limitations/implicationsEvidence from this paper might signal the need for legislative intervention to improve the competitiveness of the audit market on the basis that its concentrated structure is leading to “excessive” fees for Big 4 clients. Findings might also enhance Big 4 client bargaining power. However, as the paper analyses only one country, generalizability of the results might be a limitation.Originality/valueThis study joins two streams of the extant literature that investigate the existence of a “Big 4 audit fee premium” and different levels of audit quality among Big 4 and non‐Big 4 clients. Evidence supports the concerns raised by the UK House of Lords in 2010 that the concentrated structure of the audit market could be the driver of “excessive” fees for Big 4 clients as it does not find differences in audit quality between Big 4 and non‐Big 4 clients.

The Effects of Firm-Wide and Office-Level Industry Expertise on Audit Pricing

2003 ◽  
Vol 78 (2) ◽  
pp. 429-448 ◽  
Author(s):  
Andrew Ferguson ◽  
Jere R. Francis ◽  
Donald J. Stokes
Keyword(s):  
Audit Pricing ◽  
Accounting Firms ◽  
Market Prices ◽  
Audit Market ◽  
Industry Leadership ◽  
Market Perception ◽  
Industry Leader ◽  
Office Level ◽  
Industry Expertise

This study examines the role of auditor industry expertise in the pricing of Big 5 audits in Australia. We test if the audit market prices an auditor's firm-wide industry expertise, or alternatively if the audit market only prices office-level expertise in those specific cities where the auditor is the industry leader. We document that there is an average premium of 24 percent associated with industry expertise when the auditor is both the city-specific industry leader and one of the top two firms nationally in the industry. However, the top two firms nationally do not earn a premium in cities where they are not city leaders. We further document that national leadership rankings are, in fact, driven by the specific offices where accounting firms are city leaders. Thus, the overall evidence supports that the market perception and pricing of industry expertise in Australia is primarily based on office-level industry leadership in city-specific audit markets.

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