Fee Pressure and Audit Quality

Abstract:     
This study investigates audit fee pressure during the recession of 2007-2009 and the impact of fee pressure on audit quality. We calculate two fee pressure metrics and a composite score to measure the development of fee pressure from 2006 to 2008. Both metrics compare client audit fees in 2008, the center of the recession, to a version of benchmark ‘normal’ audit fees the companies would have paid in 2008 absent the recession. The fee pressure scores indicate significantly greater fee pressure in 2008 than in a pre-recession year, 2006. We use incidence of accounting misstatements as a proxy for auditor quality. We find clients that successfully exert fee pressure are more likely to have accounting misstatements in 2008. Overall our results suggest that auditors made fee concessions to some clients during the recession, and that fee pressure was associated with reduced audit quality in that period.

Number of Pages in PDF File: 50

Keywords: audit fee, audit quality, fee pressure, recession, misstatement, PCAOB

JEL Classification: M40, M42

working papers series