The Impact of Mandatory Audit Fee Disclosure on Price Competition in the Audit Market

• In Event: Continental Breakfast - Research and Education Forum
  In Roundtable Session: Table 4: Auditor Pricing Studies

Abstract

This study empirically examines the impact of mandatory audit fee disclosure on price competition in the audit market. We expect fiercer price competition between auditors after the public disclosure of audit fees because transparency about audit fee information is likely to increase client bargaining power and/or decrease the incumbent auditor’s bargaining power. Using a dataset including both pre- and post-disclosure audit fees we find that during a period from three years before and three years after mandatory disclosure, audit fees generally increase. However in the years after audit fee disclosure is mandatory overcharged clients experience a downward fee adjustment. In addition, undercharged clients are able to negotiate a smaller upward fee adjustment but only if they have bargaining power or have an auditor who faces more competitive pressure. These two effects are largest in the initial disclosure year suggesting anticipatory price adjusting behavior by audit firms.

Authors

• Liesbeth Averhals, KU Leuven

• Tom Van Caneghem, KU Leuven

• Marleen Willekens, KU Leuven