Post-Merger and Acquisition Audit Fees: The Effect of Using a Common Auditor Pre-Merger

• In Event: Audit Complexity, Audit Efficiency, and Audit Fees

Abstract

We investigate the following research question: does the use of a common audit firm by the merging firms in a merger and acquisition (M&A) transaction, improve post-merger auditor efficiency? An M&A transaction typically involves significant accounting and auditing complexity arising from the transition from two separate client entities to one consolidated client entity. During this transition, there is effectively a change in audit firms, as only one audit firm can survive post-merger. We predict that, when a common auditor exists pre-merger, information asymmetry will be lower, and communication between the audit teams will be more efficient, than when the two parties have different auditors. These factors should reduce audit fees. Consistent with this prediction, we find that companies that shared a common auditor pre-merger pay less in audit fees, audit related fees, non-audit fees, and total fees post-merger.

Authors

• Thomas David Adams, Temple University

• Jayanthi Krishnan, Temple University