On the persistence and dynamics of Big 4 real audit fees: Evidence from the UK

• DOI: http://doi.org/10.1111/jbfa.12310
• Date: 01 May 2018
• Published date: 01 May 2018

DOI: 10.1111/jbfa.12310

On the persistence and dynamics of Big 4 real audit

fees: Evidence from the UK

Marek Kacer1,2 David A. Peel3Michael J. Peel4Nicholas Wilson5

1CreditManagement Research Centre, Univer-

sityof Leeds, UK

2Departmentof Finance, Faculty of National

Economy,University of Economics in Bratislava,

Slovakia

3ManagementSchool, Lancaster University, UK

4CardiffBusiness School, Cardiff University, UK

5CreditManagement Research Centre, Univer-

sityof Leeds, UK

Correspondence

NicholasWilson, Credit Management Research

Centre,Leeds University Business School, Leeds,

LS29JT, UK.

Email:n.wilson@lubs.leeds.ac.uk

Abstract

Despite the huge audit pricing literature, there is a dearth of evi-

dence on the temporal dynamics of audit fee adjustments and the

persistence of audit fees. Based on a sample of 76,867 panel obser-

vations for a sample of UK companies audited by the Big 4 over the

period 1998 to 2012, we employ consistent lagged dependent vari-

able panel estimators to provide new evidence on the persistence

and dynamics of real Big 4 audit fees. Contrary to extant research,

which assumes that audit fees adjust immediately in a single period,

our empirical results indicate that Big 4 real audit fees are persistent,

being partly dependent on their previous realisations. We conclude

that static audit fee models omit a potentially important temporal

dimension of audit pricing behaviour and that further research is

warranted into dynamic audit fee models across other jurisdictions.

KEYWORDS

adjustment speed, Big 4, dynamic panel estimates, listed and unlisted

companies, partial adjustment, persistence, real audit fees

1INTRODUCTION

Despite the huge audit pricing literature, few studies haveexamined whether lagged audit fees contribute to an expla-

nation of current audit fees givenother exogenous determinants. None, to our knowledge, have modelled the influence

oflagged real audit fees on current real audit fees. Implicitly,standard audit fee models assume that audit fees are unre-

lated to fees charged in previous periods and adjust fully to their determinants in a single period.

Weprovide novel empirical evidence on the dynamics and persistence of Big 4 real audit fees for UK companies. We

report dynamic panel estimates for both the listed and unlisted firms, which exhibit highand low 1Big 4 concentration,

respectively.We focus on the Big 4 since they are of particular interest as the ‘oligopolistic’ suppliers of audit services

in listed markets.In addition, and following Reynolds and Francis (2001) and Dhaliwal, Lamoreaux, Lennox, and Mauler

(2014), who restrict their samples to Big 4/5 auditees,2we confine our estimation to Big 4 audits to reduce the effects

of cross-sectional heterogeneity and to avoid increased model complexity.3

1Peeland Makepeace (2012), report that only 8.2% of the audits of a large sample of UK private companies were conducted by Big 4 auditors.

2Notealso that prior research (Chaney, Jeter, & Shivakumar,2004; Clatworthy, Makepeace, & Peel, 2009) suggests that separate models are appropriatefor

Big4 and non-Big 4 auditees, since regression-estimated slope coefficients differ significantly between the two groups.

3Asdescribed in Section 2, for similar reasons, we also exclude from our sample companies that had switched auditors and/or company type.

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2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/jbfa JBus Fin Acc. 2018;45:714–727.