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    Does Audit Fee Homogeneity Exist? Premiums and Discounts...
    research summary posted October 29, 2013 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications, 05.0 Audit Team Composition, 05.03 Partner Rotation 
    Does Audit Fee Homogeneity Exist? Premiums and Discounts Attributable to Individual Partners
    Practical Implications:

    The results of this study point to further complications that could arise from mandatory partner rotation policies. Because the assumption underlying this policy is that all partners from any given firm are interchangeable and that the benefits of enhanced auditor independence are not expected to lead to negative consequences for the client, this study creates a conflict. The author found that different partners from the same firm do provide different levels of quality in the eyes of the client which lead to discounts and premiums in audit fees. As a result, partner rotations could lead to unforeseen costs including clients having to switch audit firms to find the preferred level of quality as well as audit firms trying to poach partners from competitors in order to satisfy clients. These added costs should be considered when assessing the value of partner rotation policies.

    For more information on this study, please contact Stuart D. Taylor.


    Taylor, S. 2011. Does audit fee homogeneity exist? Premiums and discounts attributable to individual partners. Auditing: A Journal of Practice and Theory 30 (4): 249-272.

    auditing; audit fees; audit partners; partner rotation.
    Purpose of the Study:

    Previous studies have suggested that client management chooses a level of audit quality and the related audit fees solely to satisfy the users of their financial statements. This study suggests that while satisfying financial statement users is an important factor in auditor selection, it is not the only reason for choosing a certain auditor. Furthermore, previous studies on auditor behavior imply that audit partners within the same firm provide statistically identical qualities of work, known as the “homogeneity assumption.” This study suggests that different auditors within the same firm provide differing levels of audit quality in the perception of client management and the audit partner plays a significant role in choosing an auditor.  There are costs and benefits of engaging different auditors, even different audit partners within the same audit firm, that exist in client management’s selection of auditors even if they are not valued by the financial statement users.

    Design/Method/ Approach:

    The author chose to conduct the research for this study using Australian publicly listed companies for the year 2005.  The Australian audit market was ideal for this research because disclosure of the name of the audit engagement partner in the audit report is required. The author used publicly available data to gather empirical evidence.

    • The empirical results indicate that individual audit partners earn individual audit fee premiums or discounts that can’t be explained by the firm they belong to.
    • Partners can earn significantly different levels of premiums and discounts at both Big 4 and non-Big 4 firms.
    • Cases of partners that receive fee premiums and discounts exist within the same audit firm.
    • Office level industry specialization where the partners are based does not explain the discounts and premiums.
    • Partners that receive audit fee premiums audit fewer clients and tend to have a shorter tenure than partners who receive a discount.
    • The author describes the partners that receive premiums with a shorter tenure as “rising stars” who are steadily moving from smaller to larger and more prestigious clients while the partners that receive discounts are not able to establish such a reputation and are only able to secure smaller clients.
    • If the audit market were to be solely driven by the financial statement users, one would expect that the market would consist of two completely separate classes of auditor, Big 4 and non-Big 4. However, the market price for audits is driven by both the demands of financial statement users and by the demand for a particular level of quality of audit process from client management.
    • Audit quality in the perspective of client management, apart from that for financial statement users, includes auditors that provide more efficient and less disruptive audits, will provide more informative management letters, or provide advice on certain matters.
    • The needs of financial statement users relate to the premiums and discounts to engaging a Big 4 as opposed to a non-Big 4 auditor. The demands of client management relate to the premiums and discounts paid for different audit partners. 
    Audit Team Composition, Auditor Selection and Auditor Changes, Client Acceptance and Continuance
    Audit Fee Decisions, Auditor Qualifications (e.g. size - industry expertise), Partner Rotation