The Causal Relationship between Auditor Turnover and Audit Fees-Evidence in Japan

This study investigates the causal relationship between auditor turnover and audit fees. The aim of this study is to accurately identify the real relationship between auditor turnover and audit fees. The analysis in this study is based on the counterfactual model provided by Rosenbaum and Rubin (1983). The propensity score is estimated using logistic regression, which generates a matched treatment sample and a control (counterfactual) sample. The matched dataset containing 486 firm-years is analyzed using liner regression to identify the causal relationship between auditor change and audit fees. The clearly significant result shows that low-balling exists in real audit contracts. As an additional study, the sample is divided using the auditor size variable (Dummy of Big 3 or not) into four parts. The additional results show that, after an auditor change from a Non-Big 3 auditor to Big 3 auditor, the contract exhibits low-balling. This suggests that clients who change auditors from a non-Big 3 firm to Big 3auditor do not receive an adequate audit because of the auditors' cost cutting. The coefficient of the auditor change from non-Big3 to Big 3 auditor is significant and relatively higher than the coefficients of the other parts. Audit fees need to cover the costs of the audit practice to maintain audit quality. The results of this study can serve as an alert for Japanese auditing practice quality issues.