Determinants of Fee Cutting on Initial Audit Engagements

Abstract

This study extends Simon and Francis' [1988] estimates of average cross-sectional fee cutting on initial audit engagements by describing the distribution of percentage fee changes reported by 389 client firms which switched auditors from 1983 through 1987.1 In addition, this study attempts to explain cross-sectional variance in fee cutting for a subset of 163 client firms for which required data are available. Prior research suggests that cross-sectional variance in fee cutting may exist if (1) auditor low balling varies with the financial health of clients; (2) new auditors differ from old auditors on fee-relevant dimensions such as auditor class, industry expertise, and technological efficiency; and (3) the number of auditors bidding differs across engagements. Our results support the importance of these factors in determining percentage fee cuts, with the exception of the financial health of clients. Section 2 discusses background literature and identifies factors potentially associated with fee cuts. Section 3 describes the sample and variables. Statistical tests are presented in section 4, and section 5 summarizes the results.