Emerald Management Reviews

Design/methodology/approach - Presents a simple stylized audit fee model linked with the national legal liability conventions, for an assessment of a project during one period. Includes effort and the trade-off between the expected legal liability cost and effort cost. Includes audit failure probability, and the assumption that a Big 4 auditor would pay more if found to have missed a bad project. Tests three hypotheses against the Wingate litigation index. Takes a sample of 21,559 firm-year observations from 15 countries from 1996 to 2002, and runs OLS regression.

Findings - Finds that auditor fees are higher in countries where legal liability regimes are strong, that Big 4 auditors charge higher fees, but that the Big 4 premium reduces as legal liability regimes improve. Shows this effect is stronger for smaller firms. Adds confirmatory information from audit hour samples.

Research limitations/implications - Proposes more research into country-level and institutional factors affecting effort costs and legal liability costs.

Originality/value - Presents rare information about international differences in audit fees and legal regimes, of value to audit researchers.