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Audit pricing and the Big4 fee premium: evidence from Belgium

  • Tom Van Caneghem
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    Purpose – The purpose of this paper is to study audit pricing and the Big4 fee premium in Belgium. While a number of studies have already explored these issues, the Belgian audit market provides an interesting setting to gain an additional insight into the pricing of audit services for many reasons (e.g. audit market concentration in Belgium is much lower than in other countries, the Belgian audit market mainly consists of non-listed firms, etc.). Design/methodology/approach – Besides the traditional audit fee model, based on seminal work by Simunic, the paper also estimates regression models in which the author allows coefficients to vary across Big4 and non-Big4 auditors and control for self-selection (based on a two-stage procedure). Findings – Using the traditional audit fee model, results suggest that Big4 auditors receive (or are able to charge) a fee premium compared to non-Big4 auditors. Nevertheless, when the author allows regression coefficients to vary across Big4 and non-Big4 auditors and control for self-selection, the aforementioned finding does no longer hold. The results reveal differences in fee structures between Big4 and non-Big4 auditors and suggest that Big4 auditors consider a richer set of variables when setting their fees. Research limitations/implications – Since Belgian firms are only required to disclose audit fees as from 2007 onwards, the analyses are based on data for one year only. Practical implications – An important implication, at least from an academic point of view, is that the results clearly illustrate and corroborate the need to control for self-selection when modelling audit fees (while this issue has been ignored by recent audit fee studies). The findings also have implications for the (Belgian) auditing profession. For example, the fact that significant differences are observed in audit pricing between the Big4 and non-Big4 firms may have an impact on the (Belgian) audit services market (e.g. it might influence the competitive nature of the tendering process). Originality/value – Using a two-stage procedure, the results corroborate the need to control for self-selection in modeling audit fees (an issue that has been largely ignored in the audit fee literature). In addition, the results reveal that Big4 and non-Big4 auditors have different fee structures and that it is therefore important to allow the regression coefficients (and not only the intercept) to vary across both groups. Finally, the findings add to the very scarce evidence on audit pricing for non-listed firms.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=0268-6902&volume=25&issue=2&articleid=1827884&show=abstract
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    Article provided by Emerald Group Publishing in its journal Managerial Auditing Journal.

    Volume (Year): 25 (2010)
    Issue (Month): 2 (February)
    Pages: 122-139

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    Handle: RePEc:eme:majpps:v:25:y:2010:i:2:p:122-139
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    1. Craswell, Allen T. & Francis, Jere R. & Taylor, Stephen L., 1995. "Auditor brand name reputations and industry specializations," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 297-322, December.
    2. Charles Piot, 2001. "Agency costs and audit quality: evidence from France," European Accounting Review, Taylor & Francis Journals, vol. 10(3), pages 461-499.
    3. Willekens, Marleen, 2003. "Reply to discussion of "Pricing and supplier concentration in the private client segment of the audit market: Market power or competition?"," The International Journal of Accounting, Elsevier, vol. 38(4), pages 461-464.
    4. Dye, Ronald A, 1993. "Auditing Standards, Legal Liability, and Auditor Wealth," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 887-914, October.
    5. James S. Ang & Rebel A. Cole & James Wuh Lin, 2000. "Agency Costs and Ownership Structure," Journal of Finance, American Finance Association, vol. 55(1), pages 81-106, 02.
    6. Heidi Vander Bauwhede & Marleen Willekens, 2004. "Evidence on (the lack of) audit-quality differentiation in the private client segment of the belgian audit market," European Accounting Review, Taylor & Francis Journals, vol. 13(3), pages 501-522.
    7. Nathalie Gonthier-Besacier & Alain Schatt, 2006. "Determinants of Audit Fees for French Quoted Firms," Working Papers CREGO 1060301, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    8. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    9. Datar, Srikant M. & Feltham, Gerald A. & Hughes, John S., 1991. "The role of audits and audit quality in valuing new issues," Journal of Accounting and Economics, Elsevier, vol. 14(1), pages 3-49, March.
    10. Meshari O. Al-Harshani, 2008. "The pricing of audit services: evidence from Kuwait," Managerial Auditing Journal, Emerald Group Publishing, vol. 23(7), pages 685-696, July.
    11. Willekens, Marleen & Achmadi, Christina, 2003. "Pricing and supplier concentration in the private client segment of the audit market: Market power or competition?," The International Journal of Accounting, Elsevier, vol. 38(4), pages 431-455.
    12. Mark A. Clatworthy & Michael J. Peel, 2007. "The Effect of Corporate Status on External Audit Fees: Evidence From the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1-2), pages 169-201.
    13. Titman, Sheridan & Trueman, Brett, 1986. "Information quality and the valuation of new issues," Journal of Accounting and Economics, Elsevier, vol. 8(2), pages 159-172, June.
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