Online from: 1988
|Title:||Audit pricing, legal liability regimes, and Big 4 premiums: theory and cross-country evidence|
|Author(s):||Choi J-H, Kim J-B, Liu X, Simunic D A|
|Journal:||Contemporary Accounting Research, Spring 2008, Volume: 25 Issue: 1 pp.55-99 (45 pages)|
|Keywords:||Auditing, Fees, Liability, Premiums|
|Article type:||Research paper|
|Reference:||37AJ293 (Permanent URL)|
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.