Customer-Base Concentration and Audit Pricing.

• In Event: Audit Pricing

Abstract

This paper examines whether and how auditors’ pricing decisions are affected by their clients’ customer base. We first document that customer concentration is negatively related to audit fees. This negative relationship is stronger for clients whose customers have higher costs of switching suppliers and clients who have high relationship-specific investments with their major customers. The effect of concentration on fees also depends on which stage of the firm life cycle the firm is in. The discount is strongest for firms in the growth and maturity stages, and there is actually a fee premium for firms in the decline stage. In additional analyses, we find that customer concentration is associated with a lower likelihood of accounting restatements, indicating higher audit quality. We also test whether the effect of concentration on fees differs for governmental customers. We find that governmental customer concentration is associated with higher audit fees. Thus, the relationship between customer concentration and audit pricing is nuanced, and depends upon the type of customer(s) the firm has. Finally, we find that governmental customer concentration is associated with longer audits. We find no evidence that corporate customer concentration is associated with the length of the audit.

Authors

• John Daniel Eshleman, Michigan Tech University

• Yun Ke, Brock University

• Shuo Li, Western Washington University