Análisis descriptivo de las variables y dimensiones

As previously discussed, because of the continued dominance of large company audits by the Big Four, increasing concerns have been expressed about competition issues, one of the concerns being whether there is competitive pricing in the audit market. More specifically, whether there is competitive pricing for initial audit engagements by the Big Four audit firms and the ability of the non-Big Four audit firms to compete with this (Peel, 2013). Although auditor switches do not occur often, when a change in auditor does take place the pricing of the initial audit fee offers an (observable) opportunity to examine whether competitive pricing is a feature of a market with an oligopolistic

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supply structure, such as the UK (Peel, 2013, p.637). If initial discounts are present, there are concerns from regulators that auditors will treat discounts as relevant costs and this will consequently impair auditor independence (Ghosh and Lustgarten, 2006). On the other hand, there also exists the possibility that the increase in concentration ma y have a positive influence on pricing, due to economies of scale or scope, which could subsequently lead to an increase in price competition (Peel, 2013). Beattie et al. (2003) argue that ‘while concentration measures are a good indicator of market structure, the link with competitiveness is more complex than often assumed’ (Beattie et al., 2003,

p.250). Thus, it is not always possible, without empirical analysis, to make inferences about the pricing of audit services based on concentration ratios alone.

Despite the recent investigation by the Competition Commission and the large and growing literature on audit pricing more generally, few studies have examined the pricing of initial audit engagements, fewer still relating to the UK market. 6 Pong and Whittington (1994) were the first study to examine the pricing of initial audit engagements for UK listed firms. Using a sample of 577 quoted companies for the period 1981-1988 they found that only new audits conducted by non-Big Eight auditors attracted significant fee discounts. Building on the work of Pong and Whittingto n (1994), Gregory and Collier (1996) examined whether there was any evidence of fee discounting following a change in auditor, in addition to whether there was any evidence of price recovery taking place in later years. For a sample of 399 listed firms for the period 1987 - 1991, they found that the initial fee reduction to be both large and significant at 22.4% but that it did not persist over the following three years. Gregory and Collier (1996) also investigated whether the type of auditor change made a

6

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difference to the fee reduction experienced. They found companies that switched laterally between the Big Six audit firms benefitted from a discount of 20.2%, and companies that changed from a non-Big Six to a Big Six auditor benefitted from a discount of 33.6%. Gregory and Collier (1996) therefore concluded that, in addition to offering initial fee discounts, large auditors forego the Big Six audit fee premium as an incentive for auditees of smaller firms to change to a premium auditor.

A primary focus of the Competition Commission investigation was whether the oligopolistic sector of the UK audit market was competitive. For companies that switched auditor during the sample period they therefore investigated the real percentage change in audit fees in the years after switching auditor. For direct switches, in line with academic research, audit fees generally decreased in real terms the year after a switch and returned to the previous fee level in the third year after switching. 7 The average (median) company obtained an 8% (17%) real decrease in audit fees in the first year after switching. However, compared with the fee before the switch, by the third year switching firms saw a 20% real increase on average and a median increase of 2% (Competition Commission, 2013a, appendix 2.4 p.16). However, the Competition Commission commented that they were unable ‘to reach a conclusion on whether audit firms were making profits above competitive levels’ (Competition Commission, 2013c,

p.2). This was due to difficulties such as valuing capital employed, the intangible nature of the asset base in this market, difficulties in cost allocation, and diffic ulties in

7

The main sample for the analysis consisted of direct switches, where the company remained in the FTSE 350 both before and after the switch. ‘Direct switches’ were considered to be those not associated with the collapse of Arthur Andersen, merger and acquisition activity and moves to or from joint audits (Competition Commission, 2013c, p.55).

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identifying costs due to the partnership ownership structure. However, the Competition Commission did state:

“It is our provisional view that this pattern (of reduced first-year prices and profitability, which rapidly increases over the subsequent two to three years) may indicate an adverse effect on competition (AEC) resulting from a feature or a combination of features in the FTSE 350 statutory audit market, since it demonstrates the ability of a new firm to increase its prices rapidly.”

(Competition Commission, 2013b, p.84)

Despite not being able to reach a definite conclusion regarding competitive audit pricing, the Competition Commission therefore remained concerned about the adverse effects on competition resulting from the initial price discounts for audit fees.

Peel (2013) investigated the pricing of new audits following switches between the Big Four relative to their leading mid-tier counterparts for both the listed and private firm audit market. To date, Peel (2013) is the only study to investigate the pricing of initial audit engagements for private firms in the UK. Peel (2013) analysed a sample of 7,651 companies, of which 6,084 were private and 1,555 were public, for the year 2007, with more recent data for the year 2010 downloaded to test for evidence of price recovery. Peel (2013) found evidence to show quoted companies switching auditor benefitted from an average discount on their audit fees of 18.2%. Moreover, when the switches were refined by direction Peel (2013) found larger quoted companies switching between the Big Four benefitted from a substantial price discount of 26.7%. Although quoted clients switching to the mid-tier auditors also attracted discounts, they

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were smaller in magnitude. For private firms, discounts appeared to be present on initial engagements, but Peel (2013) failed to find any evidence of price recovery. Similar to the conclusions drawn by the Competition Commission, Peel (2013) commented that it is important to note that initial discounts offer support for competition only to the extent that they show price reductions relative to continuing audits.