Does Regulating Audit Pricing Enhance Audit Quality and the Timeliness of Audit Reporting? The Texas Experience

The Texas State Board of Public Accountancy has imposed a statewide ban on lowballing of audit fees. We exploit this unique opportunity to study whether audit quality can be enhanced through regulating audit pricing. We find that audit fees are significantly higher for new clients of Texas-based auditors while audit fees are lower for new clients of auditors outside of Texas. However, we do not find a difference in the actual or perceived audit quality or timeliness of audit reports between new clients of Texas-based auditors and clients in control groups. We also find that clients of Texas-based auditors are less likely to switch auditors than clients of out-of-state auditors, consistent with higher switching costs. Thus, while the statewide ban imposes additional cost on new clients of Texas-based auditors, we do not find any corresponding economic benefits. Our findings have implications for regulators, investors and academics.