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Audit Pricing

Essay by   •  May 10, 2011  •  Essay  •  291 Words (2 Pages)  •  1,371 Views

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bershirePrior research just simply assumed industry specialists can get higher prices and ignored the role of bargaining power played in the audit pricing. In 1990s, the audit service product differentiation based on industry specialists appeared due to the lower profit following price war by deregulation of the audit market in the late 1970s. If service differentiation is valued by the clients, the auditors will have stronger bargaining position; however, the bargaining power is affected by the economic situation of auditors and clients; that is, larger clients who has important financial impact of auditors will have the ability to negotiate their audit fee. As a result, the objective of this paper is to examine the relationship among audit pricing by Big 6 CPA firms, industry specialization, and audit pricing.

This paper used questionnaires mailed in 1994 and requested audit fee data for the fiscal 1993 selected from Compustat database. Samples selected with having big 6 auditors and a SIC code below6000, excluding financial institutions. The useable survey response rate regarding to the available Compustat database is 21%. The audit fee model is OLS regression, and is regressed on the variables that control for client size, complexity and risk.

The result are consistent with Porter's framework. The evidence shows that industry specialization have higher fees, but the evidence exists only in the clients with less bargaining power; audit fees are higher for clients that are smaller in absolute size. For larger clients, there's no specialization premium and fees decrease when clients have better bargaining power.

Something I am curious about is that why the data is so old in this 2004 research? Though this answer could be solved in next paper, I still cannot accept the data used in this paper a little bit.

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