Public Equity and Audit Pricing in the United States

Posted: 10 Sep 2014

See all articles by Brad A. Badertscher

Brad A. Badertscher

University of Notre Dame

Bjorn Jorgensen

London School of Economics & Political Science (LSE) - Department of Accounting and Finance

Sharon P. Katz

INSEAD

William Kinney

University of Texas at Austin - McCombs School of Business

Date Written: May 1, 2014

Abstract

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 20-22% 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

Suggested Citation

Badertscher, Brad A. and Jorgensen, Bjorn N and Katz, Sharon P. and Kinney, William, Public Equity and Audit Pricing in the United States (May 1, 2014). Journal of Accounting Research, Vol. 52, No. 2, 2014; Columbia Business School Research Paper No. 14-38. Available at SSRN: https://ssrn.com/abstract=2493802

Brad A. Badertscher

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Bjorn N Jorgensen (Contact Author)

London School of Economics & Political Science (LSE) - Department of Accounting and Finance ( email )

Department of Accounting Room, OLD 2.17
Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://www.lse.ac.uk/accounting/people/bjorn-jorgensen

Sharon P. Katz

INSEAD ( email )

Boulevard de Constance
CEDEP No. 11
F-7705 Fontainebleau Cedex, 77305
France

William Kinney

University of Texas at Austin - McCombs School of Business ( email )

1 University Station B6400
Austin, TX 78712
United States

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