Industry-Specialist Audit Fee Premium and Financial Statement Complexity

Abstract

In this paper, we examine whether the industry-specialist audit fee premium and scale discounts are attributable to financial statement complexity. Financial statement complexity is measured using a combination of the number of Arabic numerals, the number of words, and the readability of 10-K financial statement footnotes. We find that specialist auditors charge a premium for clients with higher financial statement complexity and, correspondingly, offer scale economy discounts to these clients as well. Interestingly, even though non-specialist auditors charge a higher fee for clients with higher financial statement complexity, they do not offer scale economy discounts to these clients. We also show that a client’s financial statement complexity is distinct from its operational complexity. Collectively, our results suggest that the industry-specialist auditors’ premium is attributable to auditors’ investment in resources to handle client complexity, and not monopoly rent or compensation for audit risk.