The Association between Audit-Firm Tenure and Audit Fees Paid to Successor Auditors: Evidence from Arthur Andersen

2007 ◽  
Vol 26 (2) ◽  
pp. 95-116 ◽  
Author(s):  
Burch T. Kealey ◽  
Ho Young Lee ◽  
Michael T. Stein
Keyword(s):  
Positive Association ◽  
Audit Fees ◽  
Audit Firm ◽  
Audit Market ◽  
The Past ◽  
Auditor Tenure ◽  
Auditor Change ◽  
Auditor Switches ◽  
Arthur Andersen

This study tests whether prior auditor-client tenure is associated with the audit fees paid to the successor auditor. In the past, studying the association between tenure with the prior auditor and fees charged by the successor was problematic because of the difficulty in controlling for the causes of the auditor change. However, the collapse of Andersen in late 2002 led to a significant number of exogenous auditor switches. Using a sample of former Andersen clients, our major finding is that audit fees charged by the successor auditor varied positively with the length of the prior auditor's tenure. Given that the audit market is efficient, the observed positive association between current fees and prior auditor tenure suggests to us that successor auditors perceived higher risk from new clients having longer tenure with their previous auditor.

Auditor Tenure and the Timeliness of Misstatement Discovery

2017 ◽  
Vol 93 (2) ◽  
pp. 315-338 ◽  
Author(s):  
Zvi Singer ◽  
Jing Zhang
Keyword(s):  
Natural Experiment ◽  
Audit Quality ◽  
Client Engagement ◽  
Audit Firm ◽  
Auditor Tenure ◽  
Sarbanes Oxley ◽  
Auditor Change ◽  
Negative Effect ◽  
Extended Analysis ◽  
Arthur Andersen

ABSTRACT Using the timeliness of misstatement discovery as a proxy for audit quality, we examine the association between audit firm tenure and audit quality in a setting that alleviates the endogeneity problem endemic to this line of research. We find that longer audit firm tenure leads to less timely discovery and correction of misstatements, which is consistent with a negative effect of long auditor tenure on audit quality. In addition, using the non-voluntary auditor change following the demise of Arthur Andersen in 2002 as a natural experiment, we show that the misstatements of its former clients were discovered faster than those of comparable companies that retained their auditors throughout the misstatement. This finding speaks to the benefit of a fresh look by a new auditor. An extended analysis shows that longer auditor tenure also leads to misstatements of greater magnitudes, and that the Sarbanes-Oxley Act has mitigated, but not eliminated, the negative effect of long auditor tenure. Last, we show that the negative association between auditor tenure and timely discovery of misstatements is mainly present in the first ten years of an audit engagement. Our study has implications for regulators who continue to express concern regarding lengthy auditor-client engagement. JEL Classifications: K22; K23; L51; M41; M42; M48.

scholarly journals A Test of Audit Pricing in the Small-Client Segment: A Comment

1995 ◽  
Vol 10 (2) ◽  
pp. 223-233 ◽  
Author(s):  
Willie E. Gist
Keyword(s):  
Product Differentiation ◽  
Firm Size ◽  
Audit Fees ◽  
Price Premium ◽  
Audit Pricing ◽  
Audit Firm ◽  
Size Classes ◽  
Audit Market ◽  
Second Tier ◽  
The U.S

This study is the second to provide a richer test of the association between auditor size and audit fees by using three audit firm size classes in the small-client segment of the U.S. audit market. The finding of a Big 8 (now Big 6) price premium is consistent with Francis and Simon [1]. However, this price premium exists only with respect to local/regional firms. Francis und Simon showed that the Big 8 price premium exists with respect to both second-tier and local/regional firms. The present study also provides evidence of a second-tier price premium over local/regional firms. The results imply product differentiation to both Big 8 and second-tier firms. Plausible reasons for differences in results between the two studies are given.

scholarly journals Anticompetitive behaviour in the audit services market by the big audit firms: Evidence over time

2013 ◽  
Vol 10 (2) ◽  
pp. 56-79 ◽  
Author(s):  
Harjinder Singh
Keyword(s):  
Multivariate Analysis ◽  
Audit Fees ◽  
Total Sample ◽  
Market Concentration ◽  
Observation Window ◽  
Audit Market ◽  
Auditor Tenure ◽  
Audit Firms ◽  
Competitive Behaviour ◽  
Over Time

This study investigates the existence of anticompetitive behaviour and cartel pricing by the Big4 international providers of auditing services (resulting from the halving in the number of such providers from the Big8 to Big4).This study uses both a composite and dis-aggregated measure for auditor attributes (namely, auditor reputation, industry specialisation, provision of non-audit services and auditor tenure) and regresses the derived measure against changes in audit fees for the periods 2001 to 2003, 2003 to 2005 and 2001 to 2005 for a total sample of 600 firm-year observations.Main results from longitudinal multivariate analysis indicate that there is no significant association between the four auditor attributes utilised in this study with changes in audit fees over the observation window. This study finds no evidence of anti-competitive behaviour and cartel pricing by Big4 auditors resulting from increased audit market concentration. This has implications in relation to the need to consider legislation to reduce the power and influence of the Big4 audit firms and this subsequently has flow-on implications for the management of firms

scholarly journals The relation of auditor tenure to audit quality: Empirical evidence from the German audit market

2013 ◽  
Vol 2 (1) ◽  
pp. 27-43 ◽  
Author(s):  
Patrick Krauß ◽  
Henning Zülch
Keyword(s):  
Audit Quality ◽  
The European Union ◽  
Short Term ◽  
Audit Firm ◽  
Audit Market ◽  
Auditor Tenure ◽  
Client Relationship ◽  
Mandatory Audit Firm Rotation

This study investigates whether and how the length of an auditor-client relationship affects audit quality. Using a sample of 1,071 firm observations of large listed companies for the sample period of 2005 to 2011, the study is one of the first to empirically analyze this auditing issue for the German audit market. The empirical results demonstrate that neither short term nor long term audit firm tenure seems to be a significant factor with regard to audit quality in Germany. In the wake of the ongoing discussion in the European Union regarding the optimal audit tenure length for the quality of the conducted statutory audits, our findings do not support the idea of a mandatory audit firm rotation rule.

The Association between Audit Partner Rotation and Audit Fees: Empirical Evidence from the Australian Market

2015 ◽  
Vol 35 (1) ◽  
pp. 181-197 ◽  
Author(s):  
Jenny Stewart ◽  
Pamela Kent ◽  
James Routledge
Keyword(s):  
Empirical Evidence ◽  
Positive Association ◽  
Audit Fees ◽  
First Year ◽  
Significant Positive Association ◽  
Audit Market ◽  
Second Year ◽  
Audit Partner Rotation

SUMMARY We examine the relation between audit partner rotation and audit fees for a sample of Australian firms from 2007 to 2010. We find a significant positive association between audit fees and partner rotation in the year of rotation. The association persists in the first year post rotation and to a lesser extent in the second year post rotation. Our analysis suggests that higher audit fees are associated with both mandatory and voluntary partner rotation. However, when we divide the sample into large global clients, mid-level clients, and small local clients, we find that mandatory and voluntary rotation are associated with higher audit fees for large global clients, while only voluntary rotation is associated with higher audit fees for small local clients. We do not find an association between partner rotation and audit fees for mid-level clients. Our study suggests that the extent to which firms are able to pass on the costs of partner rotation varies across different segments of the audit market.

scholarly journals Anticompetitive behaviour in the audit services market by the big audit firms: Evidence over time

2013 ◽  
Vol 10 (4) ◽  
pp. 177-199
Author(s):  
Harjinder Singh
Keyword(s):  
Multivariate Analysis ◽  
Audit Fees ◽  
Total Sample ◽  
Market Concentration ◽  
Observation Window ◽  
Audit Market ◽  
Auditor Tenure ◽  
Audit Firms ◽  
Competitive Behaviour ◽  
Over Time

This study investigates the existence of anticompetitive behaviour and cartel pricing by the Big4 international providers of auditing services (resulting from the halving in the number of such providers from the Big8 to Big4).This study uses both a composite and dis-aggregated measure for auditor attributes (namely, auditor reputation, industry specialisation, provision of non-audit services and auditor tenure) and regresses the derived measure against changes in audit fees for the periods 2001 to 2003, 2003 to 2005 and 2001 to 2005 for a total sample of 600 firm-year observations.Main results from longitudinal multivariate analysis indicate that there is no significant association between the four auditor attributes utilised in this study with changes in audit fees over the observation window. This study finds no evidence of anti-competitive behaviour and cartel pricing by Big4 auditors resulting from increased audit market concentration. This has implications in relation to the need to consider legislation to reduce the power and influence of the Big4 audit firms and this subsequently has flow-on implications for the management of firms.

scholarly journals Dinamika Kualitas Audit Di Perbankan Syariah Di Indonesia

2019 ◽  
Vol 5 (2) ◽  
pp. 177-194
Author(s):  
Riani Riani ◽  
Sepky Mardian
Keyword(s):  
Firm Size ◽  
Audit Quality ◽  
Maximum Level ◽  
Audit Fees ◽  
Firm Reputation ◽  
Audit Firm ◽  
Auditor Tenure ◽  
Independent Audit

This study discusses and understands the competence and independence of auditors on audit quality in sharia banking in Indonesia. While in the discussion the authors analyze the things that are deemed related to the competence and independent audit of auditor tenure or rotation seen through two post-KMK regime and post Act No. 5, Audit firm reputation by looking at audit firm size, audit fees, and auditor competencies determined through background education, certification, experience of work, and frequency of training that followed. The result of the research shows that the limitation of audit tenure does not decrease the quality of audit in sharia banking, the dynamics of audit quality is formed from independent relationship and auditor competence depends on the maximum level of audit

Audit Market Concentration and Auditor Change: The Effect on Audit Fees

2020 ◽  
Vol 29 (2) ◽  
pp. 87-119
Author(s):  
Bomi Song ◽  
Juryum Chung ◽  
Geum-Joo Jhang
Keyword(s):  
Audit Fees ◽  
Market Concentration ◽  
Audit Market ◽  
Auditor Change

Spatial Competition at the Intersection of the Large and Small Audit Firm Markets

2015 ◽  
Vol 35 (1) ◽  
pp. 23-45 ◽  
Author(s):  
Kenneth L. Bills ◽  
Nathaniel M. Stephens
Keyword(s):  
Market Share ◽  
Spatial Competition ◽  
Audit Fees ◽  
Differential Impact ◽  
Audit Firm ◽  
Audit Market ◽  
Big 4 ◽  
Audit Firms ◽  
The U.S ◽  
Jel Classifications

SUMMARY In this paper, we study spatial competition in the U.S. audit market while accounting for its two-tiered nature. We provide evidence on the differential impact that market share distances within and between the players in the large and small audit markets have on competition. We find that the market share distance from small audit firm competitors has a greater effect on the Big 4's audit fees than distances from other Big 4 competitors. This finding suggests that small audit firms play a significant part in the competitive landscape in local markets. Further, we find that audit fees are increasing with the distance between a small audit firm and its closest competing small audit firm while audit fees are decreasing with the distance between a small audit firm and its closest competing large audit firm. This suggests that while obtaining separation in market space from competing small audit firms reduces competitive pressure from other small audit firms, as a small audit firm gets closer to the market space of a large audit firm it is perceived as being more like the larger audit firm and is able to obtain a fee premium like that attained by the larger audit firms. JEL Classifications: M4; M40; M41; M42; M49.

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