The effects of advertising and solicitation on audit fees

W.R. Knechel, D. Hay*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Leading academic and professional accountants have suggested that the crisis in auditing over the past few years may have had its origin in deregulation which allowed firms to advertise their services and solicit new clients, encouraging accounting firms to become more commercial. In this paper, we look at this issue in New Zealand which has the unique distinction of having separated two key forms of deregulation, namely advertising and solicitation, by 6 years. This allows us to separately examine the effect of each form of market competition on audit fees. We find that advertising is associated with increases in fees, not decreases, which suggests that quality-based advertising took place, and not price-based advertising. In contrast, solicitation corresponded with a general decrease in average fees for clients of the Big 8. We interpret this result as indicating an increase in competition among accounting firms. our results suggest that there may be a much more complex relationship among market competition, advertising and solicitation. and fees than the arguments used to originally justify deregulation. 

Original languageEnglish
Pages (from-to)60-81
Number of pages22
JournalJournal of Accounting and Public Policy
Volume29
Issue number1
DOIs
Publication statusPublished - 1 Jan 2010

Keywords

  • Auditing
  • Audit fees
  • Competition
  • Deregulation
  • Advertising
  • Direct solicitation
  • NEW-ZEALAND EVIDENCE
  • CREDENCE GOODS
  • SERVICES
  • MARKET
  • INDUSTRY
  • QUALITY
  • LEVEL
  • PRICE

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