Are audit fees discounted by successor auditors?
42 Pages Posted: 27 Apr 2022
Date Written: April 16, 2022
Due to an audit fee measurement issue in years when companies change auditors, Barua, Lennox, and Raghunandan (2020) (hereafter, BLR) dispute prior findings that successor auditors discount audit fees. In this study, we re-examine whether audit fee discounting occurs using the same dataset as BLR and arrive at a different conclusion. We test for audit fee discounting by examining fees in the years surrounding an auditor change, thus side-stepping the BLR measurement issue. We show that successor auditors discount audit fees for new clients and that these discounts persist for several subsequent years. We find that discounting occurs regardless of whether the predecessor auditor charged abnormally high or low fees prior to being replaced, suggesting that the reduction in fees after auditors changes is not simply an elimination of economic rents. We also find that discounting is most (least) likely when clients change from Big 4 to non-Big 4 (non-Big 4 to Big 4) auditors, although discounting also occurs for within-type (i.e., within Big 4 and within non-Big 4) auditor changes. Finally, consistent with a “winner’s curse" effect, we find that large fee discounts are associated with lower quality initial-year audit engagements, but that quality quickly improves as newly appointed auditors become more familiar with their clients.
Keywords: audit fee discounting, low-balling, audit quality
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