Development of audit fees in the 21st century – Evidence from the US audit market

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School of Business | Master's thesis
Degree programme
95 + 6
Since accounting environment changed remarkably in the beginning of 21st century, it raised concerns whether audit fees have increased excessively after that. The main reason for concern was additional regulation know as SOX, introduced in 2002. It tightened the requirements for both, firms preparing financial statements, as well as for auditors reviewing those statements. Besides of additional requirements, SOX also prohibited the providence of certain non-audit related services that auditors offered pre-SOX. This added pressure for auditors, and therefore expectations were that audit fees increased considerably post-SOX. For examining this, the purpose of this research was to study what the relative audit fee ratio has been, and how it has developed over time during years 2000-2017. By this it was possible to observe if audit fees have increased or not, and is there clearly visible long-term trends or changes that occurred only at certain time. In addition to general view of audit fee development, relative audit fees were also examined by controlling client size. This way it could be studied whether relative audit fees have been acting differently between smaller and bigger clients. Method used in this study was quantitative analysis, where time series analyses over years 2002-2017 were created for audit fees that are in relation to company’s sales. Besides this, relative audit fees were also examined by regression analyses that included both, simple regression analysis as well as multiple regression analysis. These were for achieving more accurate results of growth over time. Both methods were used for different samples, such as whole sample, deciles and BIG4 auditors versus non-BIG4 auditors. Especially with deciles the tests concentrated on client size. The data was obtained from Audit Analytics’ database, and final sample was comprehensive, including 123,880 firm-year observations. Study’s main findings were that audit fees have increased remarkably during the investigation period, and that main growth occurred during SOX adjustments, that is, between years 2001-2005. It was also clearly proved that smaller firms faced relatively higher audit fees, and that fees have also increased more for them than for bigger firms. It was also found that BIG4-premium existed, but only for smaller firms, and that after SOX came into effect, majority of audit firms’ fees were coming from audits, not from audit related or non-audit services as was before. As a conclusion, it can be said that audit fees increased considerably during the past two decades, but the relative share was only high for smaller firms. Audit fee ratios for bigger firms were surprisingly low, and rather decreasing than increasing, especially after SOX came into force.
Thesis advisor
Jarva, Henry
audit, auditing, auditor, audit fees, audit quality, accounting, SOX, Big 4, non-Big 4
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