The determinants of audit fees in case of a new audit engagement

This PhD thesis is composed of three papers. The first article shows the results of a systematic literature review on the audit fees determinants in case of a new engagement. It summarized the client’s factors and the auditors’ conditions that according to theoretical and empirical studies more impact on the audit pricing. The literature review suggests that, in case of a new engagement, the client’s financial condition seems to be the most relevant factor that auditors use to define the amount of the audit fees. It also recommends that future research investigates other variables that could be theoretically associated with the audit fees including the effectiveness of client’s corporate governance system and client’s reputation. The second article analyzed the impact of client’s factors on audit pricing. Specifically, it focused on the financial condition, the family control, and the quality of the board oversight of the potential audit client. So far, the literature showed controversial empirical results on the relationship between these variables and audit fees. Using a hand-collected dataset of 154 Italian listed companies, the analysis finds that the company’s financial results have a greater impact than the family control on the audit fee. Moreover, results show that the company’s financial results have a greater impact than the quality of the board oversight on the audit fees. These results can be explained with the ex-ante information asymmetry in case of a new audit engagement which makes the auditors to be less confident in those “internal-firm mechanisms” (e.g., the quality of board oversight) that can reduce the inherent and the control risks because auditors have not the possibility to test their real effectiveness. Auditors seem to prefer the use of those client’s data which are already verified by prior auditors as this can help the reliability of this source of information. Another possible interpretation is that the client’s financial results are the most relevant information to estimate the client’s going concern risk which is one of the key risk auditors should assess before the acceptance of a new engagement. The third article analyzed the impact of the client reputation on the audit fees. Using the same database of 154 Italian listed companies, it finds that a good firm reputation (measured using both Rep Risk indicator and the positive media coverage) lower the audit risk and, thus, the audit pricing in case of a new audit engagement. This result shows that to define the amount of audit fees non-financial information are also important. As International Standard of Auditing and International Standards on Quality Control indicate that before accepting a new engagement auditor should take into consideration the integrity and the reputation of a potential client, results confirm this provision. The results of this third articles provide further support to the assumption that a strong reputation strengthen the control environment and reduce the risk of financial statement manipulations. This can explain why firm reputation is a variable that auditors consider in defining the audit fee.