Regional Disparities in Audit Pricing: Evidence from Switzerland

Abstract

This study’s purpose is to prove the existence of regional disparities in terms of the relationship between audit fees and their major determinants in the Swiss audit market, which is ideal for identifying regional disparities. First, we show that audit firms compete in two regional markets demarcated by the German-French language border rather than in the nation-wide market. Second, we could not find evidence for limited price competition in the supplier-concentrated regional markets as audit firms with strong market positions cannot take significant advantage out of this in terms of price premiums. In contrast, Deloitte having a considerable but not the highest market share in French-speaking commands an audit fee premium in this regional market. The results suggest that audit fee differences within the class of large audit firms may be more due to product differentiation in terms of perceived audit quality and reputational effects than to limited price competition in the oligopoly or auditor-size hypothesis suggested by DeAngelo (1981). Regional-specific reputations of an audit firm do seem to matter and to affect audit pricing. Third, most importantly, we provide evidence for regional disparities in the mean audit fees, in the difference between the audit fees paid to Ernst & Young, Deloitte, and PwC and the audit fees paid to their respective competitors as well as in the audit fees increase over time.

Keywords: Audit Fee Determinants, Audit Pricing, Big Audit Firms, Perceived Audit Quality, Regional Audit Market, Reputation Effect

JEL Classification: M42, M48, R12, R32