The Impact of Individual Auditors’ Client Portfolios and Diversification on Audit Fees

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 3: Audit Fees I

Abstract

In our paper we investigate two aspects of individual auditors (client portfolios and industry diversification), which possibly affect the perceived service (including audit) quality of individual auditors and thus audit fees. Using a sample of Chinese public companies from 2001 to 2010, we find that audit fees are positively associated with large client portfolios at the individual auditor level but negatively associated with industry diversification of individual auditor. The positive impact of large client portfolios on audit fees is weakened if the individual auditors serve too many industries. We also find that the negative impact of diversification on audit fees is mainly driven by non-BigN individual auditors.

Our additional analyses also demonstrate that individual auditors with large client portfolios do not necessarily have longer audit delays or lower audit quality. However, holding client portfolios constant, when individual auditors serve too many industries, they have longer audit delays. Further analyses show that the impact of diversification on audit delays is also driven by non-BigN individual auditors, possibly because BigN may have more resources to help their auditors fulfill their tasks or their auditors may be more capable. This is confirmed by our final additional analyses exploring the determinants of large client portfolios of individual auditors.

Authors

• Juan Mao, University of Texas-San Antonio

• Baolei Qi, Xi'an Jiaotong University