Audit Fees and Client Industry Homogeneity

Abstract

SUMMARYThis study examines the relationship between a client industry's homogeneity and audit fees. We assume that audit efficiencies occur in audits in industries whose members have similar operations and, therefore, are where auditors benefit from the use of similar audit procedures and experience lower average audit costs. To identify industries with similar operations, we use operational expense homogeneity, which is based on the correlations between the changes in operating expenses among industry members. Adapting a standard fee model (Hay, Knechel, and Wong 2006), we find that homogeneity is negatively associated with audit fees. Further, we find that specialist auditors charge lower fees in homogenous industries. Finally, we observe a lower standard deviation of fees in more homogenous industries. Together, these results suggest that auditors sustain lower costs in audits of homogenous clients and that the similarly lower costs incurred across auditors are passed on to clients in the form of lower fees.Data Availability: Data used in this paper are available from the sources listed in the paper.