Litigation Risk and Audit Pricing: The Role of Public Equity

Abstract

Does audit pricing of U.S. firms with publicly traded equity differ from pricing of otherwise similar, firms with private equity?. The answer is potentially important for evaluating for regulatory regime design efficiency and for understanding audit demand and production economics. For U.S. firms with publicly- traded debt, we hold constant the regulatory regime, including issuer reporting mandates as well as auditor responsibilities and practices. We thus vary equity, ownership factors and public securities market factors plus any related de facto litigation risk and audit demand. In cross-section, we find that audit fees for public equity firms 12% to 25% higher than fees for similar private equity firms. Time-series comparisons for firms that change owners hip status yield larger percentage fee increases (decreases) for those going public (private). Results are consistent with substantial incremental audit fees arising from higher auditor litigation risk associated with public equity ownership.