The Effect of Audit Experience on Audit Fees and Audit Quality

TLDR

Prior research on audit experience has focused on behavioral experiments, yet it has not clarified how experience influences a complete audit engagement. This archival study investigates how audit experience affects audit fees and audit quality, and further examines the incremental impact of partners’ gender, education, tenure, industry specialization, and client importance while controlling for overall experience. Using unique China data that links audit report signees to a government database of certified public accountants, the authors analyze audit fees and absolute discretionary accruals to assess the relationship with experience. The study finds that greater audit experience raises audit fees and reduces absolute discretionary accruals, that partners’ personal characteristics signal audit care, and that the results inform China’s forthcoming regulation on localizing Big 4 offices.

Abstract

Prior research on audit experience focuses on behavioral studies that are conducted by running experiments. Although these studies provide evidence on the role of experience in completing specific audit tasks, they do not shed light on how experience affects a complete audit engagement. We conduct an archival study to examine the effect of audit experience on audit fees and audit quality. Using unique data from China, where the signees of the audit report can be identified and linked with a government database containing personal information about certified public accountants, we find that experience is positively associated with audit fees and negatively associated with absolute discretionary accruals. Furthermore, we extend the research on personal characteristics of audit partners by considering the incremental effects of gender, education, engagement tenure, industry specialization, and client importance after controlling for overall audit experience. Overall, our results suggest that the auditors’ personal characteristics may serve as a signal of the level of care that will be exercised during the audit process. Our results also have implications for China’s recently announced regulation that would require localization of Big 4 offices in China.