The Effect of the Big 4 to Big 3 Audit Market Transition on Initial Year Audit Fee Pricing in Japan
Purpose – Japanese audit market experienced a significant shift from the Big 4 dominated the audit market to the Big 3 market due to the demise of PwC ChuoAoyama in 2006 that raised concern on compromised auditor's independence. This study aims to investigate whether Japanese auditors engage in audit fee low-balling and whether the transition event from the Big 4 to the Big 3 period influences the audit pricing in the initial year of an audit engagement.Design/methodology/approach – A sample of Japanese firms listed in the First Section of Tokyo Stock Exchange during the transition from Big 4 period (2005) to Big 3 period (2006-2007) is employed in the panel fixed effects multiple regression model with audit fee as the dependent variable.Findings – Two main findings of this study are as follow. First, there is no difference in the fee paid in the initial year of audit engagement compared to continuing audit. Second, the transition to the Big 3 period contributes to higher audit fee paid in the initial year of audit compared to the prior Big 4 period. Further analysis shows that this higher initial year audit fee pricing is driven by companies that change from large firms to smaller size auditors.Several sensitivity tests that control for auditor's endogeneity support these conclusions. Research limitations/implications – These findings suggest that the transition to the Big 3 period increased the bargaining power of smaller size Japanese auditors in the pricing of the initial year audit in the short term. The generalizability of this paper's findings is constrained to economies that also share the common characteristics of a developed capital market with robust investor protection, and law enforcement institutions.Originality/value – Compared to prior initial year audit fee studies, this study investigates changes in the initial year audit pricing behavior in response to the unique empirical setting of the Japanese audit market transition from Big 4 to Big 3. Furthermore, the disclosure of audit fee information for the Japanese listed companies allow this research to measure audit fee low-balling. Unlike prior literature, this study employs the number of audit personnel data that are disclosed by the Japanese publicly listed firms to better explain audit fee variance
Year of publication: |
2019
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Publisher: |
[2019]: [S.l.] : SSRN |
Subject: | Japan | Wirtschaftsprüfung | Financial audit | Honorar | Fee (Remuneration) | Gebühr | Charges |
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