Audit Fees, Auditor Switching and Competition in the UK Auditor Market: An Analysis of UK Companies (1998-2012)

70 Pages Posted: 20 Apr 2015 Last revised: 28 Nov 2015

See all articles by Marek Kacer

Marek Kacer

University of Leeds - Credit Management Research Centre (CMRC); University of Leeds - Division of Accounting and Finance; University of Economics in Bratislava

Nick Wilson

University of Leeds - Credit Management Research Centre; University of Leeds - Division of Accounting and Finance

Date Written: April 19, 2015

Abstract

In this study we aim to undertake a comprehensive examination of the audit market in the UK covering the population of limited companies that have and/or are required to file audited accounts. The study will examine over a longer period (1998-2012) the trends in the audit market, measures of market concentration, switching behavior and the determinants of audit fees. Firms are organized into a data panel with up to 15 years of time series observations per company. We identify auditor and audit fee from the financial statements of limited companies as filed at Companies House. Using a unique and extensive dataset of financial statements and other non-financial information about all UK private and listed companies we explore the following (often inter-related) questions regarding the audit market:

1. What are the most important audit fee determinants? What are the trends in average audit fees after we control for all other relevant audit fee determinants? Are the audit fee determinants and their weights stable in time? Do the identified determinants of audit fee and their weightings differ for the various Big4 and mid-tier auditors?

2. What is the extent of auditors’ switching? What is the extent of initial price discounting? Does the discount apply regardless of the auditor and company size, year and industry sector, or are there significant differences along any of these dimensions?

3. Do customers of the Big4 pay higher fees compared to the competition? Does the same hold for the customers of the biggest mid-tier audit firms? Is the fee premium because of superior quality/service or because the auditors are exploiting market power? Are there significant differences in audit fee (premium) relating to the auditor and company size, year and industry sector? Is there any connection between audit market concentration and audit fees?

4. Does audit fee change when a company is in financial distress? Do firms in financial distress pay higher fees? Are the auditors able to anticipate bankruptcy? If there exist distress/default/exit surcharge, is it stable in time?

Keywords: L8

Suggested Citation

Kacer, Marek and Wilson, Nicholas, Audit Fees, Auditor Switching and Competition in the UK Auditor Market: An Analysis of UK Companies (1998-2012) (April 19, 2015). Leeds University Business School Working Paper No. 15-02. Available at SSRN: https://ssrn.com/abstract=2596206 or http://dx.doi.org/10.2139/ssrn.2596206

Marek Kacer

University of Leeds - Credit Management Research Centre (CMRC) ( email )

Leeds, LS2 9JT
United Kingdom

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

University of Economics in Bratislava ( email )

Dolnozemská cesta 1
Bratislava, 852 35
Slovakia

Nicholas Wilson (Contact Author)

University of Leeds - Credit Management Research Centre ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

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