Who You Know Matters: Evidence of Fee Discounts for Clients with Well-Connected Audit Committees

41 Pages Posted: 13 Feb 2013 Last revised: 1 Jun 2013

See all articles by Brant E. Christensen

Brant E. Christensen

University of Oklahoma

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Nathan Y. Sharp

Texas A&M University - Department of Accounting

Paul A. Wong

University of California, Davis - Graduate School of Management

Date Written: May 2013

Abstract

Referrals and recommendations from clients are important for audit firms to develop their client portfolios. Client audit committees are one source of those recommendations, particularly when audit committee members hold multiple audit committee memberships. In this study, we measure the connectedness of audit committees to potential audit clients and we examine the effect of this connectedness on audit fees. Based on negotiation theory and the social norm of reciprocity, we expect and find a negative association between an audit client’s connectedness and audit fees. Our results suggest that audit committee connections result in auditors offering first-year discounts of approximately 4.2 and 7.1 percent per connection for non-expert and expert auditors, respectively. We also provide evidence that first-year discounts are provided only to companies with well-connected audit committees and not to the population of audit clients generally. Finally, we find that auditors are able to leverage these audit committee connections into new clients.

Keywords: Audit Fees, Audit Committees, Social Networks, Negotiation, Reciprocity

JEL Classification: G34, M40, M41, M42

Suggested Citation

Christensen, Brant E. and Omer, Thomas C. and Sharp, Nathan Y. and Wong, Paul A., Who You Know Matters: Evidence of Fee Discounts for Clients with Well-Connected Audit Committees (May 2013). Available at SSRN: https://ssrn.com/abstract=2209408 or http://dx.doi.org/10.2139/ssrn.2209408

Brant E. Christensen

University of Oklahoma ( email )

Norman, OK 73019-4004
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Nathan Y. Sharp

Texas A&M University - Department of Accounting ( email )

4353 TAMU
College Station, TX 77843-4353
United States
979-845-0338 (Phone)

Paul A. Wong (Contact Author)

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

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