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The determinants of the UK Big Firm premium

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  • K. McMeeking
  • K. Peasnell
  • P. Pope

Abstract

Our study attempts to determine whether, and if so why, the large auditing firms are able to earn a premium on their audit work in the UK. We start by confirming the apparent existence of a Big Firm premium during the period 1985-2002. We examine industry specialisation, non-audit service fee and monopoly pricing explanations for the premium. The results of our tests of industry specialisation are mixed. There is little evidence that this premium is associated with industry specialisation when specialists are defined at the national level. Significant premia are observed if specialisation is defined at the city level, particularly if the auditor is the industry leader. However, when appropriate allowance is made for endogeneity. by modelling both audit and non-audit fees in a simultaneous equations framework, the Big Firm premium disappears. We find evidence to suggest that non-audit fees earned by auditors from their audit clients are positively related to the size of the audit fee and vice versa. Finally, when the sample is stratified by the size of audit client, we find no systematic evidence of anti-competitive pricing.

Suggested Citation

  • K. McMeeking & K. Peasnell & P. Pope, 2006. "The determinants of the UK Big Firm premium," Accounting and Business Research, Taylor & Francis Journals, vol. 36(3), pages 207-231.
    • Handle: RePEc:taf:acctbr:v:36:y:2006:i:3:p:207-231
    DOI: 10.1080/00014788.2006.9730022
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    Cited by:

    1. Abidin, Shamharir & Beattie, Vivien & Goodacre, Alan, 2010. "Audit market structure, fees and choice in a period of structural change: Evidence from the UK – 1998–2003," The British Accounting Review, Elsevier, vol. 42(3), pages 187-206.
    2. Habib, Ahsan, 2011. "Audit firm industry specialization and audit outcomes: Insights from academic literature," Research in Accounting Regulation, Elsevier, vol. 23(2), pages 114-129.
    3. Bamber, Matthew & McMeeking, Kevin & Petrovic, Nikola, 2018. "Mandatory Financial Reporting Processes and Outcomes," The International Journal of Accounting, Elsevier, vol. 53(3), pages 227-245.
    4. Rewczuk Karol & Modzelewski Piotr, 2019. "Determinants of audit fees: Evidence from Poland," Central European Economic Journal, Sciendo, vol. 6(53), pages 323-336, January.
    5. Xue, Bai & O'Sullivan, Noel, 2023. "The determinants of audit fees in the alternative investment market (Aim) in the UK: Evidence on the impact of risk, corporate governance and auditor size," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 50(C).
    6. Heuser, Simon & Quick, Reiner & Schmidt, Florian, 2015. "Die Anbieterkonzentration auf dem deutschen Prüfungsmarkt – Eine empirische Untersuchung der Jahre 2010-2013," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 69(1), pages 81-109.
    7. Cahan, Steven & Hay, David & Li, Lina Z., 2021. "Audit firm merger and the strategic response by large audit firms," The British Accounting Review, Elsevier, vol. 53(3).
    8. De Fuentes, Cristina & Porcuna, Rubén, 2016. "Main drivers of consultancy services: A meta-analytic approach," Journal of Business Research, Elsevier, vol. 69(11), pages 4775-4780.

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