The Effects of Advertising and Solicitation on Audit Fees

44 Pages Posted: 22 Feb 2006

See all articles by David Hay

David Hay

University of Auckland - Business School

W. Robert Knechel

University of Florida - Fisher School of Accounting

Date Written: January 2006

Abstract

Several leading academic and professional accountants suggest that the crisis in auditing over the past few years may have had its origin in deregulation. Deregulation allowed firms to advertise their services and solicit new clients, and it is argued that it encouraged accounting firms to become more commercial and less professional by cutting fees and reducing quality. In this paper, we look at this issue in New Zealand which has the unique distinction of having separated the two forms of deregulation, namely advertising and solicitation, by six years. This allows us to separately examine the effect of each form of market competition. We find that advertising is associated with increases in fees, not decreases, which suggests quality-based advertising and not price-based advertising. The Big 8 audit firms can afford to advertise more, and the evidence shows that they received larger increases in fees after advertising was deregulated. However, large companies have more bargaining power and fee increases were not as large for them. Solicitation appears to have increased competition and resulted in lower audit fees: The big audit firms reduced their fee premiums, and larger clients received greater fee reductions. These results suggest that to the extent market competition can undermine professionalism, that effect is most directly attributable to the ability to aggressively solicit new clients.

Keywords: auditing, audit fees, competition, deregulation, advertising, direct solicitation

JEL Classification: M49, M47, L84

Suggested Citation

Hay, David and Knechel, W. Robert, The Effects of Advertising and Solicitation on Audit Fees (January 2006). Available at SSRN: https://ssrn.com/abstract=884260 or http://dx.doi.org/10.2139/ssrn.884260

David Hay (Contact Author)

University of Auckland - Business School ( email )

12 Grafton Rd
Auckland, 1010
New Zealand

W. Robert Knechel

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

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