Do audit firms discount initial full-year audit engagements with multiple potential successor auditors?

Abstract

Auditing theory predicts fee discounting when multiple potential successor auditors bid for the client. However, the empirical evidence on this issue varies as more recent research attributes prior evidence of fee discounting to measurement errors related to audit fees’ partial-year reporting. We argue that the mixed results of previous literature are partially attributable to a failure to identify competitive auditor changes. We use U.S. Securities and Exchange Commission (SEC) disclosures of audit firm changes to identify cases with multiple potential successor auditors, which suggests more competition for the client. We compare each disclosing firm's audit fees between the first year following the auditor change year and all other years of the same disclosing firm. We find that successor audit firms discount audit fees in the first full year following the auditor change, compared to all other years, within the same disclosing firm. The fee discounting continues until at least the second full year of the engagement. Results also suggest Big N successor firms discount fees to win new engagements from smaller successor audit firms. Audit fee discounting occurs when companies dismiss their audit firm rather than when audit firms resign. Finally, we find no evidence of impaired audit quality for the 2 years following the auditor change.