Pricing of Risky Initial Audit Engagements

John A Elliott, Aloke Ghosh, Elisabeth Peltier

Research output: Contribution to journalArticleScientificpeer-review

9 Citations (Scopus)

Abstract

We reexamine the association between audit fees and risky initial engagements by developing an ex ante client-risk metric that is based on auditor change 8-K filings. We concentrate on auditor-client disagreements and other reportable events (restatement, management integrity, scope limitations, illegal acts, reaudits) disclosed in the 8-K auditor change filings. We find that audit fees are significantly higher for clients reporting disagreements and other reportable events in their 8-K auditor change filings for the initial year of engagement. However, the fee premium is only attributable to Big 4 auditors. While the Big 4 charge 45 percent higher fees when clients have disagreements or other reportable events, there is no such fee premium associated with non-Big 4 clients. More importantly, Big 4 predecessor auditors increase fees prior to the auditor switch as clients develop problems. Big 4 successor auditors continue to charge significantly higher fees for at least three years following adverse 8-K disclosures. Our results provide evidence on how successor and predecessor auditors incorporate risk in the pricing of audit fees, where risk is based on the information contained in auditor change 8-K reports.
Original languageEnglish
Peer-reviewed scientific journalAuditing: A Journal of Practice and Theory
Volume32
Issue number4
Pages (from-to)25-43
Number of pages19
ISSN0278-0380
DOIs
Publication statusPublished - 2013
MoE publication typeA1 Journal article - refereed

Keywords

  • 511 Economics
  • audit fees
  • auditor changes
  • Big 4 auditors

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