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Article: Audit pricing, legal liability regimes, and big 4 premiums: Theory and cross-country evidence

TitleAudit pricing, legal liability regimes, and big 4 premiums: Theory and cross-country evidence
Authors
KeywordsAudit Fee
Big 4 Fee Premium
Legal Liability Cost
Liability Regime Shift
Issue Date2008
PublisherCanadian Academic Accounting Association. The Journal's web site is located at http://www.caaa.ca/CAR/index.html
Citation
Contemporary Accounting Research, 2008, v. 25 n. 1, p. 55-99 How to Cite?
AbstractIn this paper, we first develop a model in which national legal environments play a crucial role in determining auditor effort and audit fees. Our model predicts that (a) audit fees increase monotonically with the strength or strictness of a country's legal liability regime; (b) given a legal liability regime, Big 4 auditors charge higher audit fees than non-Big 4 auditors; and (c) the Big 4 fee premium is lower in countries with strong legal regimes than in countries with weaker legal regimes. We then test the model's predictions using a large sample of audit clients from 15 countries with different legal regimes where audit fee data are publicly available. The results of our cross-country regressions are consistent with the above three predictions and are robust to a variety of sensitivity checks. In addition, our hypotheses are all consistent with the pattern of auditor effort (measured by labor hours) observed in proprietary data sets from four countries whose legal regimes vary. Finally, we find that the effects of a legal regime on audit pricing and the Big 4 premium are more salient for the small client segment than for the large client segment. Overall, our results indicate that a country's legal environment plays an important role in determining auditor effort, audit fees, and the fee spread between Big 4 and non-Big 4 auditors. © CAAA.
Persistent Identifierhttp://hdl.handle.net/10722/177997
ISSN
2015 Impact Factor: 1.782
2015 SCImago Journal Rankings: 2.594
SSRN
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorChoi, JHen_US
dc.contributor.authorKim, JBen_US
dc.contributor.authorLiu, Xen_US
dc.contributor.authorSimunic, DAen_US
dc.date.accessioned2012-12-19T09:41:13Z-
dc.date.available2012-12-19T09:41:13Z-
dc.date.issued2008en_US
dc.identifier.citationContemporary Accounting Research, 2008, v. 25 n. 1, p. 55-99en_US
dc.identifier.issn0823-9150en_US
dc.identifier.urihttp://hdl.handle.net/10722/177997-
dc.description.abstractIn this paper, we first develop a model in which national legal environments play a crucial role in determining auditor effort and audit fees. Our model predicts that (a) audit fees increase monotonically with the strength or strictness of a country's legal liability regime; (b) given a legal liability regime, Big 4 auditors charge higher audit fees than non-Big 4 auditors; and (c) the Big 4 fee premium is lower in countries with strong legal regimes than in countries with weaker legal regimes. We then test the model's predictions using a large sample of audit clients from 15 countries with different legal regimes where audit fee data are publicly available. The results of our cross-country regressions are consistent with the above three predictions and are robust to a variety of sensitivity checks. In addition, our hypotheses are all consistent with the pattern of auditor effort (measured by labor hours) observed in proprietary data sets from four countries whose legal regimes vary. Finally, we find that the effects of a legal regime on audit pricing and the Big 4 premium are more salient for the small client segment than for the large client segment. Overall, our results indicate that a country's legal environment plays an important role in determining auditor effort, audit fees, and the fee spread between Big 4 and non-Big 4 auditors. © CAAA.en_US
dc.languageengen_US
dc.publisherCanadian Academic Accounting Association. The Journal's web site is located at http://www.caaa.ca/CAR/index.htmlen_US
dc.relation.ispartofContemporary Accounting Researchen_US
dc.subjectAudit Feeen_US
dc.subjectBig 4 Fee Premiumen_US
dc.subjectLegal Liability Costen_US
dc.subjectLiability Regime Shiften_US
dc.titleAudit pricing, legal liability regimes, and big 4 premiums: Theory and cross-country evidenceen_US
dc.typeArticleen_US
dc.identifier.emailLiu, X: acliu@hku.hken_US
dc.identifier.authorityLiu, X=rp01079en_US
dc.description.naturelink_to_subscribed_fulltexten_US
dc.identifier.doi10.1506/car.25.1.2en_US
dc.identifier.scopuseid_2-s2.0-41449103418en_US
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-41449103418&selection=ref&src=s&origin=recordpageen_US
dc.identifier.volume25en_US
dc.identifier.issue1en_US
dc.identifier.spage55en_US
dc.identifier.epage99en_US
dc.identifier.eissn1911-3846-
dc.identifier.isiWOS:000254023400002-
dc.publisher.placeCanadaen_US
dc.identifier.ssrn730963-
dc.identifier.scopusauthoridChoi, JH=24774347900en_US
dc.identifier.scopusauthoridKim, JB=8304603800en_US
dc.identifier.scopusauthoridLiu, X=8409667100en_US
dc.identifier.scopusauthoridSimunic, DA=8409667000en_US

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