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Relative audit fees and client loyalty in the audit market

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  • Magdy Farag
  • Rafik Elias

Abstract

Purpose - The purpose of this paper is to examine the stability or loyalty in the auditor‐client relationship. It explores the association between audit fees and auditor loyalty. Specifically, it investigates whether clients paying less audit fees relative to other companies in their industries are more likely to be loyal to their auditors. Design/methodology/approach - Logistic and ordinal regression analyses are used to compare loyal clients to clients that switched audit firms after controlling for factors that are expected to be associated with client loyalty. Findings - Results show that relative audit fees have a significant effect on the degree of loyalty of clients to their audit firms. Additional analysis shows that the loyalty of clients that pay higher audit fees relative to similar clients in their industry are highly affected by increases in audit fees. However, the loyalty of clients who pay lower audit fees compared to similar clients in their industry is not affected by further increases in relative audit fees. Research limitations/implications - The study does not differentiate between auditor dismissal and auditor resignation in the classification of clients that switched auditors. It also does not classify auditor switches into auditor‐initiated switches and client‐initiated switches. Practical implications - It is cost effective for clients to stay with the same audit firm. Audit firms should be careful when adjusting their audit fees from one period to another, as there is a higher probability of losing a client, when increasing the audit fees, especially if this client is already paying higher audit fees relative to similar clients. Originality/value - The findings of this study increase the understanding of how relative audit fees affect client loyalty in the audit market.

Suggested Citation

  • Magdy Farag & Rafik Elias, 2011. "Relative audit fees and client loyalty in the audit market," Accounting Research Journal, Emerald Group Publishing Limited, vol. 24(1), pages 79-93, July.
    • Handle: RePEc:eme:arjpps:v:24:y:2011:i:1:p:79-93
    DOI: 10.1108/10309611111148788
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    References listed on IDEAS

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    1. Ahmed Ebrahim, 2010. "Audit fee premium and auditor change: the effect of Sarbanes-Oxley Act," Managerial Auditing Journal, Emerald Group Publishing, vol. 25(2), pages 102-121, January.
    2. David F. Larcker & Scott A. Richardson, 2004. "Fees Paid to Audit Firms, Accrual Choices, and Corporate Governance," Journal of Accounting Research, Wiley Blackwell, vol. 42(3), pages 625-658, June.
    3. Jones, Frederick L. & Raghunandan, K., 1998. "Client risk and recent changes in the market for audit services," Journal of Accounting and Public Policy, Elsevier, vol. 17(2), pages 169-181.
    4. Ettredge, M & Greenberg, R, 1990. "Determinants Of Fee Cutting On Initial Audit Engagements," Journal of Accounting Research, Wiley Blackwell, vol. 28(1), pages 198-210.
    5. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    6. Karla M. Johnstone & Jean C. Bedard, 2004. "Audit Firm Portfolio Management Decisions," Journal of Accounting Research, Wiley Blackwell, vol. 42(4), pages 659-690, September.
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    Cited by:

    1. Maroun, Warren & Solomon, Jill, 2014. "Whistle-blowing by external auditors: Seeking legitimacy for the South African Audit Profession?," Accounting forum, Elsevier, vol. 38(2), pages 109-121.
    2. Karen Benson & Peter M Clarkson & Tom Smith & Irene Tutticci, 2015. "A review of accounting research in the Asia Pacific region," Australian Journal of Management, Australian School of Business, vol. 40(1), pages 36-88, February.
    3. Maroun, Warren & Atkins, Jill, 2014. "Section 45 of the Auditing Profession Act: Blowing the whistle for audit quality?," The British Accounting Review, Elsevier, vol. 46(3), pages 248-263.
    4. Maroun, Warren, 2015. "Reportable irregularities and audit quality: Insights from South Africa," Accounting forum, Elsevier, vol. 39(1), pages 19-33.
    5. Mark E. Pickering, 2015. "An Exploratory Study of Profit Reporting Differences of Publicly Owned Professional Service Firms and Partnerships," Australian Accounting Review, CPA Australia, vol. 25(3), pages 262-278, September.

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