The Effect of Audit Experience on Audit Fees – Evidence from the Audit Market of Large Finnish Companies

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master_Kähäri_Otto_2020.pdf (1.25 MB)

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School of Business | Master's thesis
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Date

2020

Department

Laskentatoimen laitos

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Mcode

Degree programme

Accounting

Language

en

Pages

75

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Abstract

This study investigates the relationship between an audit signee’s overall audit experience and audit fees. In contrast with most prior literature, the study uses a measure of the overall experience of auditors to examine this relationship as opposed to measures such as audit tenure or industry specialization. The study is motivated mainly by the dearth of literature on the effects of auditors’ personal characteristics on audit work and fees and the opportunity provided by the Finnish regulatory context to examine these issues. The study uses data from the financial statements of the 500 largest Finnish companies from the fiscal years 2012-2016 to test whether audit fees are positively associated with experience. To this end, three audit fee regression models are constructed with varying definitions of the experience variable. The models are applied to two samples: a sample consisting of all the firm-year observations that fit the initial criteria and a subsample consisting only of audits conducted by the Big Four audit firms. The results of the study indicate that audit fees are not, overall, positively associated with audit experience, in contrast with expectations based on prior literature. However, significant associations were nonetheless found between experience and fees with two of the three models in both samples. The pattern that emerged from these results suggests that auditors initially gain experience that translates into higher fees during the first years of their careers after authorization, with fees reaching their peak at 6-15 years of experience. However, afterwards there is a statistically significant drop from these peak levels in fees. No sharp drop-off in fees is found for the most experienced auditors (26-40 years of experience) compared with those who have 16-25 years of experience. This pattern is similar in both the full sample as well as the Big Four subsample. The study thus extends the research on auditors’ personal characteristics by providing evidence partly inconsistent with prior literature. Although a positive association is not found, the results indicate that a well-defined experience variable may significantly contribute to audit fee models. Further research is encouraged to establish a better understanding of this relationship.

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Thesis advisor

Niemi, Lasse

Keywords

audit experience, audit expertise, audit quality, audit fees, Finland

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https://urn.fi/URN:NBN:fi:aalto-202003292657

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[gradu] Kauppakorkeakoulu / BIZ