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    Client Retention and Engagement-Level Pricing
    research summary posted April 13, 2012 by The Auditing Section, last edited May 25, 2012, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.06 Resignation Decisions, 03.02 Dismissal Decisions – impact of restatements, disagreements, fees, mergers, 04.02 Impact of Fees on Decisions by Auditors & Management 
    Client Retention and Engagement-Level Pricing
    Practical Implications:

    The results of this study are useful for regulators to consider the motives for auditor changes and to understand audit client portfolio management. The findings underscore the importance of engagement pricing as a determinant of audit firm’s client retention decisions.  Specifically, the evidence suggests that engagement pricing pressure occurs on more than an isolated basis and the audit firm’s inability to recover unexpectedly high labor usage is associated with the severing of the auditor-client relationship.


    Hackenbrack, K. E. and C. E. Hogan. 2005. Client Retention and Engagement-Level Pricing.  Auditing: A Journal of Practice and Theory 24 (1): 7-20. 

    Engagement realization rates, client retention, engagement-level pricing, engagement management, client acceptance and continuance.
    Purpose of the Study:

    Prior research suggests that auditors do not accept new audit clients that are expected to yield audit fees insufficient to cover expected costs. This implies that auditors may not expect to frequently have engagements which generate insufficient rates of return in their portfolios. This study focuses on this matter by examining the relationship between engagement-level pricing and auditor retention decisions. The objectives of the study are to examine: 

    • whether audit firms find themselves in the position of earning an insufficient audit fee on more than an isolated occurrence 
    • how important engagement-level pricing is, relative to other factors, in audit firms’ client retention decisions 
    • Another important factor affecting client retention examined in the study is client delays which unexpectedly cause auditors to use more engagement hours than budgeted.  

    The engagement-level pricing measure used in the study is the difference between “realized” realization rates (the ratio of the audit fee billed to the standard audit fee) and “expected” realization rates for each segment of the firm’s client portfolio. This measure is also referred to as an unexpected component of realization rates.

    Design/Method/ Approach:

    The authors employ a sample of fiscal 1991 public and private audit engagements of a Big 6 audit firm. The data used are from proprietary sources, including a survey, audit working papers, and a 1996 client list of the audit firm, as well as public sources. The authors use these data to examine the relationship between the unexpected component of realization rates and the audit firm’s client retention over the five-year window (fiscal 1991 - 1996).

    • The authors document that the likelihood of client retention over a five-year window decreases as the difference between realized realization rate and the expected realization rate decreases. 
    • The authors find that the probability of retaining a client decreases with a combination of the impact of client-induced delays on engagement hours and the auditor’s inability to recover unexpectedly high labor usage. The probability of client retention, however, does not depend on the realization rates alone or client-induced delays alone.
    Client Acceptance and Continuance
    Audit fee decisions, Resignation Decisions, Impact of Fees on Decisions by Auditors & Managmeent, Audit Fees & Fee Negotiations
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