SPRINT 3 “MÓDULO DE ADMINISTRACIÓN”

Empirical evidence on the initial discounting of audits fees tends to be both time and country specific and thus the findings largely depend on the audit market in question. For example, the Australian audit market studies by Francis (1984) and Butterworth and Houghton (1995) do not find any evidence of initial discounting of audit fees. Whereas a later study by Craswell and Francis (1999) finds there to be some evidence of price discounting but in the case of upward switches from a non-Big Eight to a Big Eight auditor only.

The US audit market has received the most attention from academics looking to research the pricing of initial audit engagements, and in some cases subsequent price recovery, with studies tending to report significant price discounts. Prior to 2001 US firms were not required to publicly disclose audit fees, so studies carried out before this

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date rely on private surveys. 51 Using a questionnaire survey of 440 publicly traded client-firms for the period 1979-1984, Simon and Francis (1988) find fees for initial audit engagements to be 24% lower than for continuing engagements.52 This discount then drops to 15% for the next two years and following this there is no evidence of a significant discount. Simon and Francis (1988) also repeat their analysis on a sample limited to only those firms switching to an auditor of the same tier to mitigate any potential confounding effects due to either technological or auditor reputation effects. As the analysis using same-tier auditor changes produces the same results as their full sample tests, Simon and Francis (1988) conclude that fee cutting may actually aggravate the independence problem posed by the existence of quasi-rents discussed by DeAngelo (1981). However tests to prove this were beyond the scope of the study.

Extending the research of Simon and Francis (1988), Ettredge and Greenberg (1990) examine all auditor switches covered in issues of the Public Accounting Report (PAR), an industry newsletter, for the period 1983 to 1987. For the 389 firms that switched auditors, they also find the average discount for initial engagements to be 24%. Similarly Turpen (1990) also surveys a sample of publicly traded US companies for the period 1982-1984, which includes 57 initial and 89 continuing audit engagements. Audit fees for new clients are found to be significantly lower than those for continuing engagements (19%) with additional tests also indicating that the discount persists for the second year following an auditor change.

51

On the 15th November 2001 the Securities and Exchange Commission (SEC) approved new auditor independence requirements which apply to all proxy statements filed on or after 5th February 2001. Item 9 of the SEC’s proxy regulations (Schedule 14a) requires firms to disclose information about the fees paid to an independent auditor (Ghosh and Lustgarten, 2006, p.347).

52

Using an unmatched control sample – Simon and Francis (1988) treat 226 firms that did not change auditors over the period as control firms.

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More recently, using publicly disclosed audit fees from Standard & Poor’s, Ghosh and Lustgarten (2006) compare the initial discounts given to client-firms in different segments of the US audit market, namely the oligopolistic (containing the four largest auditors) and atomistic (containing the remaining auditors) segments. Moreover, to overcome the potential biases arising from the impact of audit quality differences between auditors, in addition to considering aggregate switches, Ghosh and Lustgarten (2006) also focus on lateral switches within each market. They find that rivalries among sellers are more intense among small audit firms and that audit fee discounting is actually more extensive in the atomistic segment, with clients receiving an initial discount of 24%, compared to a discount of 4% in the oligopolistic market. Thus the findings imply that the magnitude of discounting varies according to the degree of competition among auditors.

Using a similar methodology, for a sample of 17,602 public company firm-year observations for the period 2002 – 2005, Ghosh and Pawlewicz (2009) examine whether the practice of fee discounting on initial audit engagements changed following the implementation of the Sarbanes-Oxley Act (SOX) in 2002. Similar to Ghosh and Lustgarten (2006) they present evidence of fee discounting prior to the implementation of SOX. Following the enactment of SOX, however, price discounts only appear in the atomistic market segment, suggesting that post-SOX large audit firms in the US no longer provide fee discounts for new clients. One of the explanations put forward by Ghosh and Pawlewicz (2009) for their findings is that the increased threat of litigation limits large auditors from offering price discounts to new clients on initial audit engagements in the post-SOX years. However, although robust to alternative

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specifications, their conclusions are based on an aggregate switch variable that does not take account of switch direction.

A similar US-based study by Huang et al. (2009) also presents findings to further suggest that in the post-SOX period new clients of the Big Four audit firms no longer appear to receive a discount on their audit fees. Moreover, for robustness Huang et al. (2009) also perform a matched-pairs test to ensure that their results are not being driven by industry clustering effects. After matching each switching firm with a non-switching firm on the basis of year, industry and size their results further confirm their original findings.