Auditor Mergers, Audit Quality and Audit Fees: Evidence from the Pricewaterhousecoopers Merger in the UK
Posted: 30 Sep 2012 Last revised: 1 Dec 2012
Date Written: 2012
Focusing on the merger of Price Waterhouse and Coopers & Lybrand in 1998, we document increased audit quality (measured by earnings quality of the clients) for the merged firm and other big-X auditors 1 during the post-merger period because: 1) controlling for economic conditions, clients of big-X auditors have lower levels of absolute discretionary accruals and 2) the value relevance of earnings has significantly increased. Furthermore, we find evidence that in the post-merger period, there is a significant increase in audit fees for PricewaterhouseCoopers and other big-X client firms, which suggests that the effect of collectively enhanced market power of big-X auditors (which tends to increase audit fees) dominates the effect of cost savings from the merger (which tends to lower audit fees). The results have implications for regulators and policy makers.
Keywords: Auditor merger, audit fee, earnings quality
JEL Classification: M42
Suggested Citation: Suggested Citation