Pricing Strategies of Big4 and Non-Big4 Auditors in the Light of Audit Tendering

Abstract

This study empirically investigates the effects of mandatory audit tendering on audit pricing. Specifically, we examine audit pricing strategies potentially applied by auditors when facing a tender for the upcoming period, also explicitly considering the type of auditor. Our study is motivated by the recent implementation of mandatory audit tendering in the European Union. Using a sample of 1,028 firm-year observations related to listed German companies, our results suggest that auditors facing a tender for the upcoming period charge higher audit fees than auditors not facing a tender for the upcoming period and that this fee effect is mainly attributable to Big4 auditors. In contrast, no significant difference in audit fees is observable for non-Big4 auditors that face a tender for the upcoming period compared to those that do not. In additional analyses, we do not find that auditors facing a tender for the upcoming period provide higher audit quality than auditors not facing a tender, irrespective of the type of auditor. Overall, our findings suggest that Big4 auditors apply strategies focusing on audit pricing, while non-Big4 auditors seem to use other approaches in order to be retained. Our study is, to the best of our knowledge, the first study that examines the effect of audit tenders for upcoming periods on audit pricing.