The Costs of Public Audit Oversight: Evidence from the EU

Abstract

We examine the audit pricing consequences of auditor inspections under the public oversight regime in the EU. Employing a staggered difference-in-differences design, we document an inspections audit fee premium during the post-inspection period when companies’ auditors are inspected by the national Public Oversight Body (POB). However, this effect masks significant cross-sectional variation. Specifically, we find that the increase in audit fees attributable to inspections is concentrated among POBs with sufficient human resources, where inspections occur both at the auditor’s and the regulator’s premises. Also, the effect of inspections on audit fees is evident only when the POB prohibits inspectors from joining an audit firm immediately after their departure or when the oversight system is funded by multiple stakeholders. Overall, our findings suggest that audit costs increase for clients of inspected auditors but only when inspections are more laborious, independent, and rigorous.