UK evidence of auditor brand name and industry specialisation

Abstract

There is considerable empirical evidence that after controlling for factors known to affect the level of audit fees, the large international firms earn an audit fee premium. In this paper, we estimate a Big Six premium of 10% to 23% for a large sample of UK clients. Recent studies contend that the development of brand name and industry specialisation reputations is costly and the Big Six firms can expect a return from this investment. We find evidence consistent with brand name returns across most sub-samples of clients. However, the audit fees charged by the Big Six firms are not significantly higher than the fees charged by their non Big Six counterparts for the smallest quartile of clients. An explanation for this finding is that the demand for a firm with a brand name 'bottoms out' below a critical size because of the extra cost. The audit fees charged by the Big Six firms are not significantly higher for the sub-sample where industry specialisation is defined by the size of the non audit fee. An explanation for this result is that there may be an inter-relationship between the pricing of audit and non audit services. Unlike the prior literature, we find scant evidence of returns to industry specialisation. We believe that returns to specialisation are insignificant because the UK Big Six firms are large enough to be considered specialists across all markets.