Transparency and the audit industry? Not in the U.S. Evidence on audit production costs, profitability and partner compensation from the U.K.

Abstract

In the U.S., the investing public can readily access a great deal of information about publicly-traded companies. However, the large private accounting firms that audit those companies—and that are just as economically significant—provide very little information. This paper provides insight into the audit markets by taking a novel, descriptive approach to explore the cost of performing audits, an under-examined area in the literature due to lack of data. The analyses explore audit production costs, profitability, and partner compensation at the audit-firm level, using publicly available data from the U.K. The findings suggest interesting potential differences in audit production functions between the Big Four firms, an important factor when considering the competitiveness of the audit market. Taking this analysis and applying it to the U.S. setting, an estimate of the average profitability per domestic Big Four partner is approximately $1.2 million for the year 2013. This paper intends to stimulate discussion about how public accounting firms are regulated in the U.S.