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

Alexey Lyubimov

Managerial Auditing Journal, 2019, vol. 34, issue 4, 393-437

Abstract: 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.

Keywords: Audit fees; Internal controls; Big 4 audit firms; Section 404(b) (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:majpps:maj-07-2018-1938

DOI: 10.1108/MAJ-07-2018-1938

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