The Initial Discount for New Audit Engagements: Case of UK 1998-2012
66 Pages Posted: 16 Nov 2015 Last revised: 27 May 2016
Date Written: June 1, 2016
In this paper we examine evidence and patterns of the pricing of initial audit engagements covering various types of audit firms and auditees. In contrast to existing empirical studies we use a very large sample of UK private and public companies of all sizes covering a long time period, 1998-2012, utilising 792,705 company-year observations. We employ a novel hybrid panel data estimator to explore time variant features of audit market discounting as it responds to changes in the competitive and regulatory landscape and statutory audit requirements. We confirm and replicate some of the findings of earlier studies and document the average market-wide initial discounting from data that covers both listed and private companies. We investigate the temporal stability of previous findings. Our results suggest that discounting across the whole audit market is more complex than within the listed segment alone and that figures on ‘average discount rates’ disguise some interesting variations in discount pricing across the audit market and observed changes over the estimation period. We find that changes from lower quality auditor to the higher quality auditors are rarely associated with additional discounts. Moreover, we present evidence that listed companies enjoyed higher discounts than unlisted companies. We document that the initial discounts do not lead to ‘short-cutting’ and that the audit fees revert to normal levels within a five-year period. Contributing to the recent debate on auditor choice and competition in the segment of listed companies we find evidence of strong price competition between the Big 4 Auditors in some of the estimated time periods.
Keywords: auditing; auditor change; initial discounts; low-balling; price recovery
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