Industry-Specialist Audit Fee Premium and Financial Statement Complexity

46 Pages Posted: 23 Aug 2015

See all articles by Dichu Bao

Dichu Bao

Hong Kong Polytechnic University

Rebecca Files

University of Texas at Dallas

Suresh Radhakrishnan

JSOM, University of Texas at Dallas

Date Written: August 20, 2015

Abstract

In this paper, we examine whether the industry-specialist audit fee premium and scale discounts are attributable to financial statement complexity. Financial statement complexity is measured using a combination of the number of Arabic numerals, the number of words, and the readability of 10-K financial statement footnotes. We find that specialist auditors charge a premium for clients with higher financial statement complexity and, correspondingly, offer scale economy discounts to these clients as well. Interestingly, even though non-specialist auditors charge a higher fee for clients with higher financial statement complexity, they do not offer scale economy discounts to these clients. We also show that a client’s financial statement complexity is distinct from its operational complexity. Collectively, our results suggest that the industry-specialist auditors’ premium is attributable to auditors’ investment in resources to handle client complexity, and not monopoly rent or compensation for audit risk.

Keywords: client complexity, specialist premium, scale economy discount, audit pricing

Suggested Citation

Bao, Dichu and Files, Rebecca and Radhakrishnan, Suresh, Industry-Specialist Audit Fee Premium and Financial Statement Complexity (August 20, 2015). Available at SSRN: https://ssrn.com/abstract=2648745 or http://dx.doi.org/10.2139/ssrn.2648745

Dichu Bao

Hong Kong Polytechnic University ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong

Rebecca Files

University of Texas at Dallas ( email )

800 West Campbell Road, SM 41
Richardson, TX 75080-3021
United States
9728835818 (Phone)

Suresh Radhakrishnan (Contact Author)

JSOM, University of Texas at Dallas ( email )

Mail Stop SM 41
800 West Campbell Road
Richardson, TX 75080
United States
972-883-4438 (Phone)
972-883-6811 (Fax)

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