CPA-AGRC Distinguished Speaker Series and TRSS - Ping Zhang

In conjunction with the Telfer Research Seminar Series

***M.Sc. Students, this event can count towards one of the six mandatory Research Seminars Series needed to attend (MHS6991 or MGT6991).***

Ping Zhang, PhD

In this paper, we test the relationship between the number of auditors in a market and audit fees. We argue that each auditor has a focus audit approach for auditing its clients and it is costly to adjust the audit approach for conducting a particular audit with an audit approach different from the focus one. Thus, an auditor’s relative efficiency to other auditors in the market is both auditor and client specific, and the audit fees charged by an engaging auditor to an auditee is determined by the costs of the most efficient auditor among the competitors for the auditee. Consequently, the number of auditors in a market is driven by diversity of the auditees’ characteristics and/or the distribution of available auditors’ capacities, and the relationship between the number of auditors in a market and the audit fees depends on the net impact of the diversity of the auditees’ characteristics and variance among the auditors’ capacities. 

Our empirical evidence suggests that the average audit fees across markets are not associated with the number of auditors. However, we find the audit fees charged by auditors in a particular size rank are affected by the number of auditors in the market. The auditors in the same size rank charge higher fees when a market has more auditors. However, the auditors in the same reversed size rank charge lower fees when a market has more auditors. We also document evidence that every auditor faces multiple competitors, mainly from the three largest auditors in the market. Our results support argument that an auditor’s efficiency is affected not only by the auditor’s capability, but also by the characteristics of the auditees.