Audit quality and fees: Evidence from Spain

ABSTRACT

This empirical research uses panel data methodology to find the main factors determining Spanish audit quality. on a sample with more than 60,000 audited companies from 2013 to 2018. Prior to analysing the quality of the audit, we have adjusted the best possible model to the audit fees behaviour in order to extract the abnormal fees. Our dynamic model shows that audited company’s size, the previous year’s audit fees, the years with the same audit firm, the auditor’s opinion, the auditor rotation, the concentration or dedication to the client and the client sector are explanatory factors of audit fees. Further, we find evidence that audit quality improves with number of hours billed for audit work and decreases with sector concentration of auditor and, a novel multiplicative effect, the auditor size by abnormal audit fees, in such a way that the surcharge (abnormal fees) of the big audit firms contribute negatively to improve the audit quality.

KEYWORDS:

• Audit fees
• auditor size
• auditor’s opinion
• audit quality

JEL Codes:

• M41
• M42
• C23

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. ‘Big Four’ or Big-4 is the term generally used to refer to the biggest world firms in the consulting and auditing sector, and which currently consist of: Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (EY) and KPMG.

2. These authors insert an appendix with a review of literature on affection.

3. Other information on concentration (concentration of fees on total income, sector concentration of the audit company, and the audit company’s concentration per client) may be requested from the authors.

4. Due to space constraints, Table 3 does not include information on the following variables, which may be requested from the authors: Panel A, realisable, fixed assets, and accruals; Panel B, asset turnover; Panel C, number of subsidiaries and Book/Market.

5. This value is exponential of the coefficient, since the dependent variable is express as a logarithm (see expression (1)).

Additional information

Funding

This work was supported by the Instituto de Contabilidad y Auditoría de Cuentas (Spain) [IDT-ASEPUC-ICAC-2019].