The Effect of Audit Market Deregulation on the Pricing of Brand Name Reputation

Allen T. Craswell, Jere R. Francis and Stephen L. Taylor
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Allen T. Craswell: University of Sydney, Postal: NSW 2006 AUSTRALIA
Jere R. Francis: University of Missouri, Postal: Columbia, MO 65211 USA
Stephen L. Taylor: University of Sydney, Postal: NSW 2006 AUSTRALIA

Working Papers from University of Sydney, Department of Accounting

Abstract: Between 1982 and 1987, the Australian audit market experienced an increase in price competition resulting from changes in professional rules governing advertising and marketing practices as well as the introduction of widespread audit tendering. Because these changes are generally assumed to have reduced any alleged ability of the Big Eight to earn oligopoly profits, they provide an opportunity to test alternative explanations for the observed Big Eight audit-fee premia. If the market was not competitive, the Big Eight premium may be the result of market imperfections and the changes in professional rules could be expected to lead to a decline in the premia. Alternatively, if the market was competitive and the premia were attributable to product differentiation, it would be sustainable notwithstanding deregulation of the market. The initial analysis of panel data of publicly reported audit fees for a six- year period suggests that reductions in real audit fees are more marked among Big Eight clients and occur more quickly in response to a change of auditor. However, using seemingly unrelated regression it appears that structural adjustments were made to the audit-fee process and the Big Eight premium did not decline over the six year period. This result does not support allegations that Big Eight fee premia result from a relatively uncompetitive audit market.

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