The Pricing of Initial Audit Engagements by Big 4 and Leading Mid-Tier Auditors

45 Pages Posted: 21 Dec 2009 Last revised: 17 Mar 2010

See all articles by Michael J. Peel

Michael J. Peel

Cardiff University - Cardiff Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 16, 2009


This paper presents new evidence on the pricing of initial audit engagements by big 4 auditors relative to their next four largest mid-tier (‘mid 4’) competitors, following voluntary auditor switches - with reference to the public and private corporate markets, and according to the type of switch - from big 4, mid 4, other mid-tier and smaller auditors. Estimates for separate hedonic pricing models are reported which, inter alia, circumvent the potential bias inherent in models which pool the audits of the big 4 with their smaller counterparts. For quoted companies, in contrast to recent U.S. evidence, significant and large initial discounts are evident in the Main Market for those larger auditees switching between big 4 auditors. Although there is some evidence that smaller firms quoted on the junior AIM market switching from big 4 to mid 4 auditors benefit from smaller discounts, there is no significant evidence that mid 4 auditors offer discounts to secure the audits of companies listed on the Main Market who switch to them from the big 4. Furthermore, the results also revealed an absence of price rivalry between big 4 and mid 4 auditors for initial audit engagements in the more competitive private corporate market. Nor is there any evidence that these auditors offered discounted audit fees to entice smaller private firms to opt for voluntary audits.

Keywords: Initial Engagements, Discounts, Leading Auditors, Auditor Switches, Hedonic Models, Quoted Market, Private Companies, Voluntary Audits

JEL Classification: M42, M49, L11

Suggested Citation

Peel, Michael J., The Pricing of Initial Audit Engagements by Big 4 and Leading Mid-Tier Auditors (December 16, 2009). Available at SSRN: or

Michael J. Peel (Contact Author)

Cardiff University - Cardiff Business School ( email )

United Kingdom

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