The Initial Discount for New Audit Engagements: Case of UK 1998-2012

66 Pages Posted: 16 Nov 2015 Last revised: 27 May 2016

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: June 1, 2016

Abstract

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

Suggested Citation

Kacer, Marek and Wilson, Nicholas, The Initial Discount for New Audit Engagements: Case of UK 1998-2012 (June 1, 2016). Leeds University Business School Working Paper No. 16-03. Available at SSRN: https://ssrn.com/abstract=2691019 or http://dx.doi.org/10.2139/ssrn.2691019

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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