Audit Office Costs and Audit Fees: Impact of Auditor Salaries

• In Event: Auditing 2

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 audit fees are not consistent across all offices.
The differences in fees are impacted by office specific costs, specifically auditor salaries, which are inconsistent across all geographic regions. In this study, I use publicly available auditor salary data as a proxy for city specific costs. The results show that clients pay higher audit fees when they engage auditors which operate in locations of higher costs. Failure to control for these local costs in the audit fee model will 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 include city fixed effects, to control for city specific factors which influence audit fees.

Author

• Neal Andrew Vanden Berg, Temple University