Audit Office Industry Expertise, Audit Production, Audit Fees, and Audit Firm Market Power

• In Event: Differences Across Audit Offices
  In Paper Session: Differences across Audit Offices

Abstract

The objective of this study is to disentangle the relationship between audit fees and industry expertise by introducing efficiency effects. We investigate whether office industry expertise results in more efficient audits and whether the market power of the individual audit firm determines whether and how these efficiencies are shared with the client. Using a proprietary dataset of 910 audit engagements from one Belgian Big 5 audit firm we find that increased office industry expertise is associated with efficiency gains, as evidenced by a negative association between office industry expertise proxies and the total amount of audit hours. The results further illustrate that realized audit efficiencies are entirely passed-through to the client in the full sample. However, when the audit firm has stronger market power, the pass-through is partial and realized efficiencies are shared between the firm and the audit client. Finally, we also present evidence that these efficiency gains are not detrimental for audit quality as an abnormal accruals analysis does not show evidence of decreased audit quality.

Authors

• Simon Dekeyser, KU Leuven

• Ann Gaeremynck, KU Leuven

• Marleen Willekens, Katholieke Universiteit Leuven