Auditor Salaries and Client Audit Fees: A Location Based Analysis

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 15: Auditing Pot Pourri

Abstract

Audit fees and the audit fee model are used pervasively throughout the accounting literature as a measure of earnings quality and audit quality. Although it is common knowledge in practice, the accounting literature fails to control for the fact that auditor office costs, specifically auditor salaries, are not consistent across all offices. The costs for each local office are passed onto clients by adjusting the hourly bill rates. As office specific hourly bill rates are not publicly available from audit firms, this study uses publicly available salary information to proxy for these bill rates. The results show that locations with higher costs will bill their clients higher audit fees. Failure to control for these local specific costs in the audit fee model, may result in biased inferences about the earnings quality and audit quality. The results of this paper suggest any research utilizing the academic model for audit fees, should consider city specific cost factors or city fixed effects, in order to control for the unobservable differences in auditor bill rates between cities.

Author

• Neal Andrew Vanden Berg, Temple University