Public Equity and Audit Pricing in the U.S.
Brad A. Badertscher
University of Notre Dame
London School of Economics & Political Science (LSE) - Department of Accounting
Sharon P. Katz
Columbia Business School - Accounting, Business Law & Taxation
William R. Kinney, Jr.
University of Texas at Austin - Department of Accounting
January 8, 2014
Journal of Accounting Research, 2014
To what degree are audit fees for U.S. firms with publicly traded equity higher than fees for otherwise similar firms with private equity? The answer is potentially important for evaluating regulatory regime design efficiency and for understanding audit demand and production economics. For U.S. firms with publicly-traded debt, we hold constant the regulatory regime, including mandated issuer reporting and auditor responsibilities. We vary equity ownership and thus public securities market contextual factors, including any related public firm audit fees from increased audit effort to reduce audit litigation risk and/or pure litigation risk premium (litigation channel effects). In cross-section, we find that audit fees for public equity firms are 20% to 22% higher than fees for otherwise similar private equity firms. Time-series comparisons for firms that change ownership status yield larger percentage fee increases (decreases) for those going public (private). Results are consistent with litigation channel effects giving rise to substantial incremental audit fees for U.S. firms with public equity ownership.
Keywords: public and private firms, ownership structure, audit fees, litigation risk
JEL Classification: M41, M42, M44
Date posted: January 4, 2013 ; Last revised: January 10, 2014