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The Effect of Audit Firm Size on Audit Prices

In: Business and Management

Submitted By xjin3
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The effect of audit firm size on audit prices

The study is to mainly address questions about how accounting firm size affects the audit prices and and the issue on how auditor changes affect companies’ audit fees. Three factors, which are market competition, the extent to which audit services are differentiated, and scale economies, can affect the relationship between audit prices and accounting firm size.
There is one view that if audits are homogeneous goods, accounting firm size would not affect either audits or audit prices. However, there are reasons to believe that audits are not homogenous goods and that product differentiation occurs with respect to audit quality. As mentioned, audits are a market for reputations. Shockley reports evidence that perceptions of auditor independence are significantly different between large and small accounting firms and that perceptions of auditor reputation are also different even within the Big Eight group. Therefore, public companies prefer large accounting firms that auditors have higher education. Further, the studies have made several hypotheses to examine the questions and also used a regression model to determine the effects of accounting firm size on audit fees in the Australian market. Simunic used ten variables to control for the quantity of auditing supplied and partitioned the sample into large and small auditees. This is to test a joint hypothesis of product differentiation and economies of scale, which support that product differentiation was present in a competitive market structure. In addition, the study also finds that higher prices are consistent with higher quality audit so that companies would like to contract for higher priced audits from large accounting firms. As for pricing cutting of initial audit fees, the study also shows weak evidence that initial audit fees are higher than continuing…...

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