Journal Article

CITY-LEVEL AUDIT FEE PRESSURE, AUDITOR OFFICE SIZE, AND AUDIT QUALITY

Reid, Colin D, Beck, Allison K, Wright, Wesley C

2024

Overview

Much research has examined how engagement-level audit fees impact audit quality. Several studies suggest that unusually high or low audit fees charged at the engagement level detrimentally affect audit quality. In this study, we investigate how fee pressure in the auditor's local environment affects audit quality by developing a measure of citywide audit fee pressure and examining its effect on audit quality, (as measured by earnings management and restatements). We analyze the audits of small and large Big Four offices both together and separately and find similar results for the overall sample as we do for both sub-groups-that audit quality is diminished in cities with greater fee pressure (while controlling for engagementspecific audit fee pressure, auditor competition, and other audit and city attributes). Interestingly, the effects appear to be the greatest for larger Big Four offices. While prior research has largely treated audit fee pressure as an engagement-specific construct, our results suggest that audit quality is impacted by city-level fee pressure and therefore it may be beneficial for the PCAOB to scrutinize audits in high-fee-pressure markets more carefully.

• Publisher: The Journal of Theoretical Accounting Research
• Subject: Audit fees / Audit quality / Auditors / Cities / Costs / Decision making / Earnings management / Efficiency / Financial restatements / Profits