Clustering in Audit Fees as a Signaling Device? An Empirical Analysis

• In Event: Audit Pricing

Abstract

This study examines clustering in audit fees. Specifically, using audit fee data, we explore the occurrence of specific price endings (odd and round price endings in particular). We expect price clustering to be present in the market for audit services because external auditing is a credence service and specific price endings might be used by auditors as a signaling device. Following price (quality) image effect theory, we expect that non-Big 4 (Big 4) auditors are more likely to use odd (round) pricing to signal higher value for money (quality). Using a data set including both pre- and post-disclosure audit fees of private clients, we find round prices (i.e., prices ending in ‘000’) and half-round prices (i.e., prices ending in ‘500’) to prevail and occur significantly more often than would be normally expected. Interestingly, differences in price clustering are observed among different auditor types. For example, round prices are significantly more prevalent among Big 4 auditors (and PwC in particular) and half-round prices are significantly more prevalent among second-tier auditors. These results suggest that Big 4 and second-tier auditors use (half-)round prices to signal quality. Our results further indicate that clustering is significantly more prevalent after mandatory disclosure of audit fees.

Authors

• Liesbeth Averhals, KU Leuven

• Tom Van Caneghem, KU Leuven

• Marleen Willekens, KU Leuven