On the Persistence and Dynamics of Big 4 Real Audit Fees: Evidence from the UK

Abstract

Despite the huge audit pricing literature, there is a dearth of evidence on the temporal dynamics of audit fee adjustments and the persistence of audit prices. Based on a sample of 76,867 panel observations for a sample of UK listed and unlisted companies audited by the big 4 over the period 1998 to 2012, we employ consistent lagged dependent variable panel estimators to provide new evidence on the dynamics of real big 4 audit prices, together with their equilibrium convergence speed. Contrary to extant research, which assumes that audit fees adjust immediately into equilibrium in a single period, our empirical results indicate that real big 4 audit prices are persistent, being partly dependent on previous realisations of audit fees. We conclude that static audit fee models omit a potentially important temporal dimension of audit pricing behaviour and that further research is warranted in a wider context and across other jurisdictions.

Keywords: real audit fees, big 4, partial adjustment, persistence, adjustment speed, dynamic panel estimates, listed and unlisted companies

JEL Classification: M42, M49, C4, L11