Do Clients Get What They Pay For? Evidence from Auditor and Engagement Fee Premiums

Posted: 6 Apr 2017 Last revised: 27 Aug 2018

See all articles by James Moon

James Moon

Georgia Institute of Technology - Scheller College of Business

Jonathan E. Shipman

University of Arkansas

Quinn Thomas Swanquist

University of Alabama - Culverhouse School of Accountancy

Robert Lowell Whited

North Carolina State University

Date Written: February 20, 2018

Abstract

Despite the intuitive appeal, prior research finds mixed evidence on whether higher audit fees translate to superior audit quality. Under the assumption that product differentiation between auditors is based, in large part, on the level of financial statement assurance, we propose more refined measures of excess audit fees that separate auditor premiums from other fee premiums. Consistent with our conjecture, we identify significant variation in audit pricing across auditors (i.e., auditor premiums) that relates positively to audit quality. Conversely, we find no evidence that higher engagement-specific fee premiums (i.e., fee model residuals) are positively related to proxies for audit quality. Additional tests indicate that our results do not simply reflect premiums attributable to auditor characteristics evaluated in prior research (e.g., Big 4 membership, office size, and industry-expertise). In fact, our findings suggest that the positive association between auditor premiums and audit quality is better captured at the auditor level than it is at the auditor "tier", office, auditor-industry, or engagement levels. In sum, our results suggest that auditors charging higher fees, on average, deliver superior levels of financial statement assurance, but engagement-specific fee premiums do not reflect quality-enhancing audit effort. These contrasting results provide a possible explanation for the mixed findings in prior research.

Keywords: Audit Pricing, Auditor Quality, Auditor Selection, Audit Markets

JEL Classification: M40, M41, M42

Suggested Citation

Moon, James and Shipman, Jonathan E. and Swanquist, Quinn Thomas and Whited, Robert Lowell, Do Clients Get What They Pay For? Evidence from Auditor and Engagement Fee Premiums (February 20, 2018). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2945730 or http://dx.doi.org/10.2139/ssrn.2945730

James Moon (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Jonathan E. Shipman

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Quinn Thomas Swanquist

University of Alabama - Culverhouse School of Accountancy ( email )

Tuscaloosa, AL 35487
United States

Robert Lowell Whited

North Carolina State University ( email )

Raleigh, NC 27695
United States

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