Do Partners with Large Prestigious Audit Clients Earn Fee Premiums?

Abstract

This paper examines whether audit partners who audit large prestigious clients can earn audit fee premiums for doing so. As the largest clients are assumed to have insider knowledge of the quality of partners and the market power to select the partner of their choice, their choice will inform the market and other, smaller auditors as to who are the highest quality partners. Smaller clients can then pay a premium to secure the services of these partners to obtain the rewards of a higher quality audit. Empirical examination of a sample of 6,698 audits of Australian listed companies for the period 2009 – 12 shows that partners with large prestigious clients can earn significant fee premiums. This results still holds when the largest clients are omitted from the sample. Furthermore, partners who have an increase in the size and prestige of their clients can earn a fee premium.