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

Accounting and Business Research, 43(6), pp. 636-659, 2013.

Posted: 11 Jul 2013 Last revised: 6 May 2014

See all articles by Michael J. Peel

Michael J. Peel

Cardiff University - Cardiff Business School

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Date Written: July 11, 2013

Abstract

The recent investigation of the UK audit market by the Competition Commission testifies to perennial regulatory concerns regarding increasing supplier concentration, big 4 dominance of large company audits and the capacity of mid-tier auditors to compete. Against this backdrop, this paper presents new evidence on whether there is competitive pricing for initial audit engagements by big 4 auditors relative to their next four largest mid-tier (mid 4) counterparts for the UK quoted and private corporate sectors. Based on data from FAME for 2007 and 2010, the evidence indicates that larger quoted companies switching between the big 4 benefit from substantial discounts, with smaller discounts attracted by clients switching to the mid 4. Coupled with evidence that fees for both audit and non-audit services recover in subsequent periods, and consistent with the theoretical framework, the paper concludes that big 4 discounting is a competitive outcome aimed at securing future economic rents. New evidence demonstrates that smaller clients switching to big 4 or mid 4 auditors do not benefit from low-balling.

Keywords: audit competition, audit fees, initial audit engagements, fee discounting, price recovery

JEL Classification: M42, M49, L11

Suggested Citation

Peel, Michael J., The Pricing of Initial Audit Engagements by Big 4 and Leading Mid-Tier Auditors (July 11, 2013). Accounting and Business Research, 43(6), pp. 636-659, 2013., Available at SSRN: https://ssrn.com/abstract=2292482

Michael J. Peel (Contact Author)

Cardiff University - Cardiff Business School ( email )

Cardiff
United Kingdom

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