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Auditor size and audit pricing: evidence from small audit firms

111 citations0/0 files storedEuropean Accounting Review

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Auditing, Earnings Management, Governance Accounting and Organizational Management Corporate Governance and Financial Management

Abstract

In a competitive market, audit prices can vary if the clients believe that the quality of audits varies. Previous research links auditor independence, a key element of audit quality, to auditor size and consequently suggests a positive association between audit quality and auditor size. Moreover, by using the dichotomy approach (Big Five/non-Big Five), numerous studies in many countries have found that the largest audit firms with international reputations earn fee premiums due to their perceived higher quality. Little is known, however, about pricing differences arising from product differentiation among small audit firms. This study examines the relation between auditor size and audit prices by using the data on hourly billing rates and the auditor characteristics from 103 small Finnish audit firms. This study documents, after controlling for the auditor's technical capability, the positive association between auditor size and audit pricing. The results suggest that both size and technical capability have a positive impact on auditor remuneration, implying that product differentiation also takes place among these small audit firms.

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References

2024The Quarterly Journal of Economics 1981Auditor size and audit quality 1981The Role of Market Forces in Assuring Contractual Performance 1983Premiums for High Quality Products as Returns to Reputations 1995Auditor brand name reputations and industry specializations 1993Perceived Auditor Quality and the Earnings Response Coefficient 2001Silver Signals: Twenty-Five Years of Screening and Signaling 1990The market for audit services

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