Are Audit Fees Discounted in Initial Year Audit Engagements?

56 Pages Posted: 6 Dec 2019

See all articles by Abhijit Barua

Abhijit Barua

Florida International University - School of Accounting

Clive S. Lennox

University of Southern California

Aneesh Raghunandan

London School of Economics

Date Written: November 20, 2019

Abstract

Many studies report that audit fees are discounted in the year of an auditor change and regulators have long been concerned that such fee discounting could impair audit quality. We find significant bias in the way studies have tested for fee discounting. The bias exists because interim procedures are usually performed by both the predecessor and successor auditors but only the successor’s fee needs to be disclosed. Accordingly, the disclosed fee during the auditor change year usually relates to a partial year of auditing services. We find that the evidence for fee discounting disappears after correcting for this measurement bias.

Keywords: auditing; audit pricing; audit fee discounting; audit quality; initial-year audits

JEL Classification: M42

Suggested Citation

Barua, Abhijit and Lennox, Clive and Raghunandan, Aneesh, Are Audit Fees Discounted in Initial Year Audit Engagements? (November 20, 2019). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3490856

Abhijit Barua

Florida International University - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-3483404 (Phone)

Clive Lennox

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Aneesh Raghunandan (Contact Author)

London School of Economics ( email )

United Kingdom

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