Audit Fees, Auditor Switching and Competition in the UK Auditor Market: An Analysis of UK Companies (1998-2012)

Abstract

In this study we aim to undertake a comprehensive examination of the audit market in the UK covering the population of limited companies that have and/or are required to file audited accounts. The study will examine over a longer period (1998-2012) the trends in the audit market, measures of market concentration, switching behavior and the determinants of audit fees. Firms are organized into a data panel with up to 15 years of time series observations per company. We identify auditor and audit fee from the financial statements of limited companies as filed at Companies House. Using a unique and extensive dataset of financial statements and other non-financial information about all UK private and listed companies we explore the following (often inter-related) questions regarding the audit market: 1. What are the most important audit fee determinants? What are the trends in average audit fees after we control for all other relevant audit fee determinants? Are the audit fee determinants and their weights stable in time? Do the identified determinants of audit fee and their weightings differ for the various Big4 and mid-tier auditors? 2. What is the extent of auditors’ switching? What is the extent of initial price discounting? Does the discount apply regardless of the auditor and company size, year and industry sector, or are there significant differences along any of these dimensions? 3. Do customers of the Big4 pay higher fees compared to the competition? Does the same hold for the customers of the biggest mid-tier audit firms? Is the fee premium because of superior quality/service or because the auditors are exploiting market power? Are there significant differences in audit fee (premium) relating to the auditor and company size, year and industry sector? Is there any connection between audit market concentration and audit fees? 4. Does audit fee change when a company is in financial distress? Do firms in financial distress pay higher fees? Are the auditors able to anticipate bankruptcy? If there exist distress/default/exit surcharge, is it stable in time?