Component Auditors and Audit Fees

• In Event: Compensation Contracts, Audit Fees, and Audit Committees

Abstract

We examine whether engaging a component audit firm (CA) and listing that firm in the audit report impacts audit fees. Current standards provide the principal audit firm (PA) with a choice of whether to disclosure or not the use of a CA. However when not disclosing a CA in the audit report, PAs are required to perform additional testing procedures around CAs’ audit plans. Information asymmetry may arise when a PA does not perform these procedures and instead chooses to mention the CA in the audit report. Accordingly PA’s may increase audit fees to offset greater perceived audit risk. In a sample of U.S. companies from 2003-2010 we find a positive association between disclosing a CA and audit fees. We also examine PA-CA pairings (Big 4 versus non-Big 4) and find when a Big 4 PA is paired with Big 4 CA, there is an incremental increase in audit fees. Finally, we show that the larger the portion of the audit completed by the CA, the larger the perceived risk to the PA and thus higher PA audit fees, but that the location of the PA (U.S. versus non-U.S.) has a negligible effect on perceived auditor risk.

Authors

• M. Kathleen Harris, University of Nebraska–Lincoln

• Scott E Seavey, University of Nebraska–Lincoln