butterworth and houghton - 1995 - auditor switching - the pricing of audit services

Journal
of
Business
Finance
t3'
Accounting,
22(3).
April 1995, 0306
686X
AUDITOR SWITCHING: THE PRICING
OF
AUDIT
SERVICES
s.
BUTTERWORTH
AND
K.A.
HOUGHTON.
INTRODUCTION
The cost of obtaining audit reports has, in recent years, come under increasing
scrutiny. A sub-committee of the United States Senate investigated this issue
and found evidence of a lack of competition in the provision of audits to major
US corporations (Chung and Lindsay, 1988). Studies in the United Kingdom,
Canada and the United States reveal that companies in these countries doubt
that they are getting value for the money spent on audits (Firth, 1985). One
strategy employed by auditees to mitigate these costs is to engage in audit
tendering, and the common resultant phenomenon, to switch auditors. The
alleged benefit of this auditor change is that the new auditor cuts the price of
the initial audit.' That is, after controlling for other factors that affect audit
fees, a new auditor is said to charge less for an audit than an incumbent auditor.
The presence,

or
otherwise, of price-cutting has important implications for the
independence of auditors and the level and type of competition in the auditing
industry. However, in Australia (and elsewhere), evidence as to the existence
of price-cutting through auditor switching is largely anecdotal,* and evidence
in the research literature is mixed. This paper seeks to more systematically
investigate the relationship between auditor switching and audit fees, using
the population of companies under the monitoring control of the Western
Australian Division of the Australian Securities Commission.
The next section of the paper reviews the relevant theoretical and empirical
literature and develops the hypothesis to be tested. The third section contains
a description of the methodology used in the study. The fourth section presents
the empirical findings and the fifth section summarises the findings and describes
the limitations to the study and those findings. The sixth section describes some
The authors are from the University of Melbourne, Australia. They gratefully acknowledge the
assistance of the Australian Securities Commission, Western Australian Division, the financial
suppon of the Coopers and Lybrand Accounting Education Research Fund and the helpful comments
of Jere Francis (University of Iowa), Bill Kinney (University
of
Texas), Don Stokes (University
of Southern Queensland), Stephen Taylor (University of Sydney), Philip Brown and Gary Monroc
(University
of
W.A.) and Christine Jubb (The University of Melbourne) and participants at
workshops at Monash University (Clayton), City University (London), the University of Texas
(Austin), the University of Western Australia and the Annual Conference of the Accounting
Association of Australia and New Zealand. Any remaining errors are the sole responsibility
of
the authors. (Paper received April 1993, revised and accepted July 1993)
Address for correspondence: K.A. Houghton, Fitzgerald Professor

of
Accounting, Faculty of
Economics and Commerce, the University
of
Melbourne, Parkville, Victoria
3052,
Australia.
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UK
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323
324
BUTTERWORTH AND HOUGHTON
of the policy implications of the results. The final section contains conclusions
and proposals for future research.
THEORY AND LITERATURE REVIEW AND HYPOTHESIS FORMULATION
This section consists of three parts, the first of which reviews the theoretical
reasons as to why an auditor might cut initial audit fees. The second part reviews
the empirical evidence as to the existence
or
otherwise of price-cutting, and

the third part formulates the hypothesis to be tested.
Theoretical Formulation
In a competitive market for audit services one can theoretically justify the
presence of fee-cutting for initial
audit^.^
Despite this, the professional audit
literature condemns price-cutting as being irrational and harmful to the
profession.
For
example, practising accountants have decried the possibility
that the practice may lead to sub-standard audits which harm financial report
users.' It can also be argued (see the penultimate section) that price-cutting
reduces auditor independence, and thereby violates the ethical requirement
that audits should be priced
so
as to maintain auditor
impartial it^.^
Given this
apparent professional predisposition, one could be excused for believing that
price-cutting would be a rare phenomenon. However, the anecdotal evidence
in Australia indicates that the practice is becoming increasingly common.
Contracting theory may explain this behaviour. Coase
(1937)
suggests that
a firm auditee may be viewed as a nexus of contracts. The substance of those
contracts is that factor-providers (claim-holders) give control of their factors
of production to an entrepreneur, in return for a pay-off from the firm in
a
future period. Those pay-off functions are specified in terms of accounting
numbers which are calculated according to the rules set down in the claim-

holders' ex-ante contracts with the firm. The main role of the auditor is to
examine the accounting numbers produced by the auditee to determine the
degree of correspondence between those accounting numbers, and the numbers
that would be produced by applying the contracted-for accounting rules. If
there is a high degree of correspondence, an auditor will signal this to the claim-
holders by issuing a clean audit report,
or
if
the degree of correspondence is
low
(or
if
a
serious flaw exists), the signal will
be
in the
form
of a qualified report.
A commonly accepted set of rules
for
determining accounting numbers may
evolve over time (Anderson and Stokes,
1986).
However, each auditee would
modify those rules to reflect the particular nexus of contracts that constitute
that auditee. This leads to a demand by different auditees for different audit
systems and procedures (Anderson and Stokes,
1986).
The incumbent auditor
will develop unique systems and procedures that enable

it
to deliver the required
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325
service in the most efficient manner possible (Anderson and Stokes, 1986).
Therefore, during the initial stage of the audit, an incoming auditor’s systems
and procedures may not be perfectly adapted to the task of monitoring the
claimholders’ ex-ante contracts. Consequently, an auditee is likely to bear
auditor-switching costs in familiarising a new auditor with the accounting and
information systems of the auditee. As
a
result, an auditee may not costlessly
change auditors. This means that the possibility exists for an incumbent auditor
to set a fee above the avoidable cost (including opportunity costs) of doing the
audit, without the auditee finding it profitable to change to
a
new auditor. That
is, an auditor is able to earn quasi-rents (de Angelo, 1981b).6 As has been
argued elsewhere, quasi-rents may lead to the practice by potential auditors
of ‘low-balling’,
or
the setting
of

initial audit fees below
total
audit costs (de
Angelo, 1981a), to attract new auditees and the fees (including quasi-rents)
that may flow from them.
The next part of the paper examines evidence of the existence of fee cutting
in the market for audit services.
Empirical
L
iteralure
One could argue that the seminal work in this area is Simunic (1980). Using
a regression approach he found no evidence of significant price-cutting in the
audits of the 397
US
companies in his sample. Subsequent related studies
(including Chung and Lindsay, 1988; Francis, 1984;7 and Palmrose, 1986a)
arrived at similar conclusions.
The first such study to find price-cutting was Francis and Simon (1987),
but
it
was based on a small sample size (12 changes). That paper motivated
a
much more substantial study involving 214 auditees switching auditors, and
a
similar number that did not (Simon and Francis, 1988). This later study did
find a significant association between auditor switching and price-cutting in
the early years of an engagement. This study is an important contribution but
suffers from certain difficulties arising out of the fact that in the US audit fee
information is non-public and therefore fee data is drawn from responses to
questionnaires. The response rate was 24% with no reported information on

any possible non-response bias. Arguably, those who responded were more
likely to be those who were reporting ‘good news’ (a decline in audit fees) rather
than other facts. Such
a
bias, if it exists, would provide an over-estimate of
the general presence of price-cutting. One would not be surprised therefore
if
such a study found the existence of fee-cutting.
In more recent studies (not using the methodology adopted by the above
cited researchers), Turpen (1990) found that fees for new engagements were,
interalia,
lower than fees for predecessor auditors, and Ettredge and Greenburg
(1990) found
a
mean audit fee reduction of
25%
after auditor switching.
A
laboratory simulation by Schatzberg (1990) found evidence of ‘low balling’,
a
finding consistent with the presence of price-cutting on initial engagements.
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BUTTERWORTH
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Table
1
Results of Empirical Studies Investigating Price-Cutting
Country Date Price
Year(s) Cutting
Results
Private Sector
1.
Simunic (1980)
2.
Chung
&
Lindsay (1988)
3.
Francis (1984)
4.
Palmrose (1986a)
5.
Francis
&
Simon (1987)
6.
Simon
&
Francis (1988)
7.
Schatzberg (1990)
8.
Turpen (1990)
9. Ettredge

&
Greenburg (1990)
Baber, Brooks
&
Ricks (1987)
Public Sector
10.
11.
Rubin (1988)
USA
Can.
Aust
.
USA
USA
USA
USA
USA
USA
USA
USA
1976
1979
1981
1984
1984
nla
1982-4
1983-7
1974-8

1980-4
1982
No"
No"
No
No
Yesb
Yes'
Yes"
Yes
Yes
Mixed
Nod
Notes:
a
Indirect text
of
price-cutting only.
Potential small sample problem.
The fee data
from
'change' auditees was collected by questionnaire with only a
24%
response
rate.
"
However, indirect evidence
of
price-cutting was found.
In two studies of audit fees in the public sector, Baber, Brooks and Ricks

(1987)
and Rubin
(1988)
found some evidence of audit price-cutting, but due
to sample size
or
other methodological difficulties, were unable to report the
'change' variable in the regression functions as being significant.
In
1988,
Simon and Francis described the 'research evidence as inconclusive',
and little has changed since. A summary of the findings is provided in Table
1.
FOGW
ofthe
Present
Study
The previous sections have suggested that price-cutting is theoretically
justifiable, and that its presence can be empirically tested by comparing the
fees charged by new and incumbent auditors. To determine whether
or
not
this phenomenon is present in the Australian market, the following research
question is tested:
In a given year, are the fees charged by auditors who are in their first year of an
engagement, all things being equal, significantly lower than those charged by
incumbent auditors?
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If this question is answered in the positive, then evidence of price-cutting will
have been found.
For
the purpose of
our
study, auditor change
(or
switch) is defined as a change
in the audit firm specified in the auditee’s annual report between the two years
of our inquiry (1987 and 1988). As with the audit fees themselves this
information is publicly available, and there exist non-trivial regulatory penalties
for disclosure of false
or
misleading information. ‘Changes’ in auditor due to
the merging of audit firms,
or
audit firm name changes are regarded as ‘no
change’. An auditor is regarded as incumbent where no change exists between
1987 and 1988. Note that the reasons behind auditor switching may not be
fee-based. For example, auditor switching may occur because of auditee
takeover and because of changes in company directorates.’ Also an auditor
change may occur because of qualitative reasons not associated with price. One
important non-price factor may be the provision and extent of availability of
non-audit business services by the audit firm.

Recent evidence from the Trade Practices Commission Enquiry into the
accounting profession showed that the market for audit services was very
competitive and that auditor choice was determined by a number of factors
including price and expertise (which may incorporate both audit and non-audit
services).
The present study differs from the preceding research in one
or
more of the
following three ways. First, the study is based on a population of companies,
and not a sample (either derived randomly
or
other~ise),~ second, the study
is based on information on the public record, and third, the model which has
been developed in the present study allows for control of potentially confounding
variables beyond those which have
so
far been considered in the literature.
These are considered in some detail in the section which follows.
METHODOLOGY
To test for price-cutting
it
is necessary to control for those factors (in addition
to price-cutting) which affect audit fees. The first sub-section below identifies
those factors. The second determines a research design which controls for those
factors and which can be used to test the hypothesis of interest and defines
the variables to be used in the study. The third and fourth sub-sections outline
the variable measurements used and describe the company database
respectively.
Audit
Fee

Factors
In order to execute the audit task, the auditor must perform both compliance
and substantive testing.
lo
Client-specific characteristics will affect the carrying
out of these tests and therefore, the audit fee. The literature reveals that four
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BUTTERWORTH AND HOUGHTON
client-related factors are important.
I'
These are:
Client Size:
Consistent with the findings of numerous other audit fee
studies,"
it
is expected that as client size increases, the audit fee increases.
This is because as the auditee increases in size, then
all
other things being equal,
the auditor will have to perform more work to ensure adequate compliance
and substantive testing. However, the audit fee should increase at
a
decreasing
rate because the larger the auditee, the easier it is for the auditor to achieve
economies of scale in its production function (Firth, 1985). Provided that the
audit market is competitive, such savings will be passed on

to
the auditee.
Alternatively, auditing is
a
sampling-based procedure. As the auditee grows
in size, the sample size required to give
a
certain degree of control will increase
at a decreasing rate (Simunic, 1980), thereby allowing the auditor to do
proportionately less work (and therefore charge less to the auditee) for each
unit increase in auditee size.
Client
Complexify:
Given the results
of
most other studies,13 it is expected that
as client complexity increases,
so
too does the audit fee. The reason for this
is that the more complex the client, the more time the audit manager must
spend co-ordinating the audit function, and the greater the difficulties incurred
in performing audit duties. This suggests that the more complex the auditee,
the more resources must be consumed in order
to
carry out an audit
of
a
given
quality and therefore, the higher the audit fee. This function may also increase
at a decreasing rate.

For
example, Palmrose (1986a) found that the audit fee
was significantly and positively related to the natural log of a measure
of
complexity.
Client
Risk:'*
Another factor that may affect the audit fee is the risk that the
auditor might be successfully sued by claim-holders of an auditee who have
suffered a negative pay-out, caused (at least in part) by the auditor negligently
concluding that the auditee's accounts were drawn up in accordance with the
contracted-for accounting rules when this was not the case. This could impose
significant costs upon the auditor.
To
reduce this risk, the auditor may devote
more resources to testing, and pass this cost on to the auditee. Alternatively,
the auditor may demand
a
premium to bear the risk of auditing the client.
Given either
of
these propositions, it is expected that auditors will demand
higher fees from clients who expose them to a greater risk
of
being successfully
sued by claimholders (Firth, 1985).
Client Industry:
Some prior research has suggested that an audit
fee
will be

influenced by the auditee's industry.I5 Possibly this is due
to
differences in
audit risk across industry groupings (Simunic, 1980; and Palmrose, 1986a).
Alternatively, different industries may have different audit requirements that
may require differing amounts of work in the audit and, consequently, attract
different audit fees. In the context of the present study,
a
critical industry
differentiation exists between companies in the mining and extractive industry
and non-mining companies. All other things being equal, the less diverse nature
of the asset base and generally qualitatively simpler nature
of
those companies
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(at least in Western Australia) leads to the expectation that mininglextractive
industry companies will have lower fees than other companies.
To test for price-cutting in the first year of an audit, four client-specific factors
are controlled for: size, complexity, risk and industry. It is also necessary to
control for factors relating
to

the auditor.
Auditor Size:
Empirical studies suggest that auditor size is an important
determinant of the cost of an audit.I6 A number of reasons have been
suggested for this. Firstly,
it
is aruged that large auditors can achieve economies
of scale in their production function, and provided that the audit market is
sufficiently competitive, those savings will be passed on to the auditee (Firth,
1985). Secondly, it is argued that large auditors will deliver
a
higher quality
audit (de Angelo, 1981b). Consequently, one would expect larger firms
to
charge higher fees, even if the market for audits is competitive (Rosen, 1974).
Alternatively,
it
is possible that large auditors may form a cartel
so
as to charge
a monopoly price to those firms who wish to obtain higher quality audits (Firth,
1985). Despite some contradictory results in previous Australian ~tudies,’~ the
expectation is that Big
8
auditors will have higher fees than Non-Big
8
auditors.
Non-Audit Services Provided
by
the Auditor:

Simunic (1984), Palmrose (1986b)
and Turpen (1990) found an association between audit fees charged to auditees
and the fees for non-audit services (“AS’) which they purchased from their
auditor. There are two reasons why the audit fee charged may be affected by
the provision of NAS. Firstly, audits may serve as a ‘loss-leader’ for firms
providing both audits and NAS (Hillson and Kennelley, 1988), with auditors
recouping audit losses through an upwards adjustment of the NAS fee. As a
result,
it
is possible that audit fees are a decreasing function
of
NAS fees (Simon
and Francis, 1988). Secondly, there may be a link between NAS and the audit
fee caused by the presence of spillovers of knowledge from the NAS area to
auditing and vice versa (Simunic, 1984). According
to
Simunic (1984), the
effect of these knowledge spillovers on the audit fee depends on whether a
spillover from NAS to auditing reduces the start-up cost of an audit
or
the
marginal cost of auditing, the price elasticity
of
demand for auditing and the
effect on NAS costs of
a
spillover from auditing to NAS.
Research Design
To
control for the effect of the factors outlined above and to test for price-cutting,

a
multiple linear regression model of audit fees is used.
To
avoid the econometric
problems that could be caused by pooling observations across time, cross-
sectional data is used.” Given the limitations inherent in such
a
research
design, the audit fee model takes the following form:
FEE,
=
bo
+
bICHANGE,
+
b,AUD,
+
b,,NAS,
+
b$IZE,
+
bSCOMP,
+
b6RISK,
+
b71ND,
+
p
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BUTTERWORTH
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Where,
FEE;
=
Audit Fee charged to auditee
i,
=
Hypothesis Variable, first year of engagement,
=
Size of auditee
i’s
auditor (Big
8
or
Non-Big 8),
=
Amount of NAS provided to auditee
i
by its auditor,
=
Size of auditee
i,
=
Complexity of auditee
i,

=
Risk
to
the auditor of the auditee
i,
auditee
i,
CHANGE;
AUD;
NAS,
SIZE;
COMP;
RISK;
IND;
=
Industry classification (mining or non-mining) of
CL
=
error.
Variable Measurement
The measurement
of
each of these variables is outlined below.
Audit Fee:
The audit fee charged to auditees is measured by the dollar value
of
audit fees paid by the firm to its auditor. This dollar value is required to
be disclosed by law.”
Auditor Change:
To test the hypothesis that new auditors charge less than

incumbent auditors in a given year, a dummy variable, coded
1
if
the audit
of a firm is the initial engagement for the audit (and zero otherwise),
is
included
in the regression model. If the hypothesis is true, then the regression co-efficient
on this dummy variable should be statistically significant and negative.
Auditor Size:
As with other studies in this field, auditor size is measured using
a dummy variable coded 1
if
the auditor is a member
of
the first tier of
auditors2’ (the Big 8,
or,
more recently, the Big
6);
otherwise coded zero.
Provision
of
Non-Audit Services:
In this study, the amount of non-audit services
provided by an auditor to an auditee is measured by the dollar amount of NAS
purchased by the auditee from its auditor. As with the audit fee, this amount
must by law be disclosed by the auditee. This continuous variable captures
the possibility that the greater the amount of non-audit services provided by
the auditor, the greater will be the potential spillover effects

or
the greater will
be the potential
for
audit fee/non-audit services fee trade-offs, and the greater
Client Size:
Consistent with other researchers, (see for example, Francis and
Simon, 1987; and Gerrard
et
al., 1986) the size
of
an auditee is measured using
the book value
of
the auditee’s total assets.
Client Complexty:
Most researchers in this field have measured the complexity
of
an auditee by using a continuous measure of its legal/organisational dispersion
such as the number of consolidated subsidiaries in the auditee’s group of
companies. The rationale behind these measures
is
that the greater the
dispersion that is shown by
a
firm’s structure, the more intricate and
sophisticated become the legal and operational forms adopted by the firm
(Taylor and Baker, 1981). Consistent with this, the present study uses the
number of companies in the auditee’s group (holding company plus subsidiaries)
as

the measure for complexity.21
.
will be the effect on the audit price.
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1
Client Risk:
Following the practice of previous studies,"
a
dummy variable
is used to control for risk. It is coded
1
if an audit qualification is given by
the auditor.23 The rationale behind this measure is that some form
of
audit
qualification may signal the possibility
of
'significant uncertainties which may
result in future losses to the auditee' (Simunic,
1980),
consequently exposing
the auditor to
a

higher risk of being successfully sued as
a
result
of
the audit.
It has the further advantage that, in contrast
to
the risk measures used in some
other studies, there appears
to
be no
a priori
reason for believing that it is
a
proxy
for
the size
or
complexity of the a~ditee.'~ Two such measures
of
risk
are used in this study: audit qualification in the year the auditor is changed
in this study
(1988),
and the year preceding
(1987).
The first measure represents
a contemporaneous measure
of
risk, the second

a
lagged measure. Note that
these variables have the disadvantage of not capturing the effect
of
gradations
in auditee risk on the audit fee.25
Client Industry:
The companies in the sample were divided into their industry
groups as classified by the Australian Stock Exchange. Industry influences were
then controlled
for
by using a dummy variable coded
1
where
a
company was
involved in the extractive industry and
0
if
not.
Company Selection and Data
The data used in this study came from a computerised data-base
of
the Annual
Reports
of
433
Western Australian-headquartered companies maintained by
the (then) Department of Corporate Affairs in Perth, Western Australia, now
part of the Australian Securities Commission. Unlike other studies, this

represents the population of all publicly listed companies in the region.26
RESULTS
This section consists of four parts. The first considers the results of the data
selection process. The second part provides results
of
univariate tests on the
sample data, and the third shows the results of the regression analysis. The
final part carries out further tests on the data.
Sample
Companies were included in the analysis where certain conditions were met:27
Valid
No.
of
Cases
433
1.
Total companies on file;
2.
Active (i.e. trading) Companies (neither failed in
1988
3.
The company had filed its
1988
annual report and it
nor dormant);
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BUTTERWORTH AND HOUGHTON
had been processed by the regulators at the time of
data collection;
305
organizational complexity was determinable;
293
determined for both
1987
and
1988.
268
4.
Information on the company’s subsidiaries1
5.
The company’s auditors and audit fee could be
Of
the
433
companies on the database,
268
fulfilled the selection criteria.
Of
these,
37
(13.8%)
changed auditors between
1987
and
1988.

Changes
to
Big
8
firms totalled
29
(including ten changing from one Big
8
firm to another,
and nineteen changes from Non-Big
8).
There were
8
which changed to Non-
Big
8
firms (including one change within this sector, and seven changes from
Big
8
firms). As noted above, these changes are exclusive of changes caused
by auditor name changes and mergers. Table
2
shows the distribution of
companies in the sample across industry groups and across the Main and Second
boards of the Australian Stock Exchange in Perth.
Table
2
Summary of Sample Coverage by Industry and Board
Panel
A:

Industry Coverage
Stock Exchange Total Non-Change Change
Industry Sample
Corn
pan ies Companies
Classification
R&D
-
Hi-Tech
R&D
-
Others
Retail
Manufacturing
Consultancy
Property investment
Investment
-
others
Financial services
Leisure
&
Tourism
Construction
Mining (Extractive)
Transport
Health
Total
8
(3%)

7
(3%)
28 (10%)
26 (10%)
8
(2%)
9 (3%)
21
(8%)
9 (3%)
5 (2%)
1
(0%)
2
(1%)
4 (2%)
140 (52%)
268
7
(3%)
5
(2%)
7 (3%)
9 (4%)
19
(8%)
8
(3%)
4 (2%)
1

(0%)
2
(1%)
4 (2%)
26 (11%)
23 (10%)
116
(50%)
23
1
1
(3%)
2
(5%)
2
(5%)
3
(8%)
1 (3%)
0
(0%)
2
(5%)
1
(3%)
1
(3%)
0
(0%)
0

(0%)
0 (0%)
24 (65%)
37
Panel
B:
Board Classification
Stock Exchange Total Non-Change Change
Industry Sample Companies Cornpan ies
Main
219 (82%)
188
(81%) 31 (84%)
Second
49
(18%) 43 (19%)
6 (16%)
Total
268 (100%)
231 (100%) 37 (100%)
Note:
Percentages
may
not add
to
100
due
to
rounding.
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Table 3
Descriptive Statistics for the 268 Companies in the Study
~
Variable
Total Sample
231
Non-Change
37
Change
Companies Companies
Mean
Std.
Deu. Mean
Std.
Deu. Mean
Std.
Deu.
Audit Fee
(SAOOO)
47.3
193.1 39.6
121.4 95.0 424.1

NAS
Fee ($A000)
27.1
105.9
20.6
43.5 68.2 262.9
Total Assets ($AM)
93.2
61.9 66.4
31.3 26.0
147.9
Year
%
% %
Per Cent
of
Auditees
-
all “on clean’
1988 26.5 21.6 27.2
opinions
1987 18.3 18.9 18.2
Substantive
1988 4.9 5.6
0.0
Audited
by
Big
8
firms

1988 61.2
58.4 78.4
Notes
’
‘Nan clean’ qualifications include all forms of qualifications including minor matters such as
the use
of
secondary auditors for subsidiaries and the like.
Substantive qualifications include only matters relating
to
concerns about the reported
performance
or
financial position. These include opinions
of
the ‘subject to’, ‘except for’ and ‘adverse
opinion’ types.
qualifications
1987 8.6
9.1
5.4
Descriptive Statistics
Descriptive statistics for the price model variables are provided in Table
3.
Although some differences in means were apparent, no statistically significant
differences
for
the control variables were observed between the change and non-
change groups.” This is consistent with the findings
of

other studies in this
area.
Regression Analysis
The basic version of the regression model is tested by modelling untransformed
audit fees against the untransformed independent variables. Residuals from
this model are found to violate the
OLS
regression assumptions. As with
previous studies of audit pricing using Australian data, (Francis, 1984; and
Gerrard et
al.,
1986) a loglo transformation of the dependent and continuous
independent variables utilised in the study is used to address this problem.
The results for the model using the transformed data are provided in Column
A of Table
4.
This table shows that the model is significant and explains over
70%
of the variance in the transformed audit fees.
Most
of the control variables
are significant (at the
5%
level
or
better), and, where relevant, have the
predicted signs. Further, the regression assumptions of normally distributed
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BUTTERWORTH AND HOUGHTON
Table
4
Results
of
Regression Analysis
for
Audit Fees in
1988
~~~ ~
A
B
Independent Expected Base-Model Lagged Audit
Variables
Si'ns
Qualifications
N=
268
268
Auditor
a
-
-0.002
-
0.099
Change
b

-
0.049 -0.185
C
0.961 0.854
Size
a
+
+
0.336
+
0.333
b
9.94 10.23
C
0.000
0.000
Complexity
a
+ +
0.384
+
0.392
I-,
7.63 7.90
C
0.000
0.000
Risk a
+
+

0.067
+
0.108
b
1.76 2.80
c
0.079 0.066
Industry
a
-
-0.143 -0.133
b
-4.05 3.79
c
0.000
0.000
Hig
81
a
+
+
0.081
+
0.081
c
0.030 0.028
Non-Audit
a
t
I-

+
0.134
+
0.135
Services
b
4.54 4.70
C
0.000
0.000
Non-Big
8
b
2.18 2.21
Constant
-4.30 -4.38
-3.45 -3.67
0.001
0.000
Adjusted
R'
71.2% 72.2%
F-
Ra
tio
111.1 99.7
No1e.r:
it
=
regression co-efficient, b

=
&statistic, c
=
level of significance.
1.
Variable
Measures:
Audit Fees
=
log,,, of published audit fees. Size
=
log,,, book value of
auditee's
total
assets. Complexity
=
number
of
subsidiaries
+
1,
Risk
=
dummy coded
1
if
auditec
I-ccrives an audit qualification. Auditee Industry
=
dummy coded

1
if
auditee is in the Resources
Scctor. Auditor Size
=
dummy coded
1
if
auditor is in the Big
8.
NAS Provided
=
log,,,
of dollar
value of NAS provided. Hypothesis Variable
=
dummy coded
1
if
auditee changed auditors between
1987
and
1988.
2.
7'ests:
Where an
a
priori
expectation could be made about the effect of
a

variable on audit fees,
a
one-tail test was used for significance.
residuals and constant variance are not violated.*' The results in Table
4
are
lound not to be sensitive
to
the presence
of
outliers,30 multi-collinearity3' nor
observations having an undue infl~ence.~' A similar analysis, using the lagged
measure
of
risk is presented in Column
B
of
Table
4.
An examination
of
Columns A and
B
of
Table
4
shows that the regression
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AUDITOR SWITCHING: THE PRICING
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335
co-efficient on the auditor change dummy is negative, that is, an initial audit
fee is lower than
a
non-initial fee. However, the difference
is
not significantly
different from zero. Therefore, the hypothesis that, across the whole market
and in
a
given year, new auditors charge less than incumbent auditors is
rejected. More simply put, there is no evidence of market-wide price-cutting
in these Australian companies.
Tests
for
Alternative Explanations
Given the existence of anecdotal evidence of the presence of fee-cutting, and
mixed previous research evidence on this issue, further tests were executed to
determine if any alternative explanations exist for the general result found.
The further tests relate to
(1)
presence of an interaction between change and
to a move to a high
or
low ‘quality’ auditor,

(2)
the possibility of auditor change
for the purpose
of
‘opinion shopping’ and
(3)
the association between audit
and non-audit services and fee setting for these services. In addition, given
the important place of the mining industry in the market under consideration,
the effect of industry specific differences (mining versus non-mining) is also
discussed.
Audit Quality Price Premiums
One explanation for no difference between the prices charged by new and
incumbent auditors may be that certain auditors charge
a
quality premium
for
their services. De Angelo (1981b) argues that as audit firm size increases,
so
too does the quality of service that it offers. The reason for this is that the
quasi-rents obtained by an auditor may act as a bond against unprofessional
behaviour by the auditor.33
As an auditor increases in size and collects more quasi-rents, the value of
this bond will increase. Consequently, to prevent
loss
of their bond, large, that
is, Big
8,
or
as they are now known, Big

6,
audit firms have an incentive to
offer relatively high quality audit services. Therefore, it would be expected that
as audit firm size increases (Big
8
as opposed to Non-Big 8),
so
does the quality
premium charged by that firm. Hence, if the companies changing auditors in
the sample were moving to Big
8
auditors (and in the sample there were many
more changes to the Big
8
than away) then the amount
of
the quality premium
paid by them may have been off-setting the effect of any price-cutting which
may have been occurring. To control for this effect, the fee model (without
the auditor size dummy) was re-estimated using two sub-samples.
The first sub-sample was chosen by selecting those auditees using a Big
8
auditor and either (1) did not change their auditor,
or
(2)
changed from another
Big
8
auditor (those who changed from Non-Big
8

auditors were excluded).
The second sub-sample contains those firms who use
a
Non-Big
8
auditor and
either (1) did not change auditors,
or
(2)
changed from another Non-Big
8
auditor (those who changed from a Big
8
auditor were excluded). To the extent
0
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336
BUTTERWORTH
AND
HOUGHTON
that any quality premium is related to auditor class and is relatively constant
over time, change firms in each sample should not pay a markedly different
quality premium. This procedure resulted in
a
reduced sample
of
97 (104 less
7
between audit firm class changes) companies in the Non-Big

8
sample, and
145 (164 less 19 between audit firm class changes) in the Big
8
sample. The
results for the Big
8
sample were similar to those
for
the main equation, and
indicated that the auditor change dummy was not significantly different from
zero. Therefore, quality premiums do not appear to be a factor explaining the
non-observance of price-cutting for new Big
8
audits. In the Non-Big
8
sample,
the auditor change variable was significant
(1
=
2.09, sig.
=
0.04). However,
this result is highly suspect as it involves only one change auditee.
Given this result, the sub-samples were respecified with the change variable
being redefined as change to an auditor in a different audit firm class. That
is, the change variable was classified as
1
if
a

Big
8
auditee in 1988 was
a
Non-
Big
8
auditee in 1987, or
a
Non-Big
8
auditee in 1988 was
a
Big
8
auditee
in 1987. In both the Big
8
and Non-Big
8
sub-samples the change variable
was insignificantly different from zero. This suggests
no
quality premium effect.
Audit ‘Opinion Shopping’
A further factor that may confound the effect that initial audits may have on
fees is the nature of an auditee’s audit report. It is possible that auditees who
receive qualified audit opinions will be motivated
to
change auditors (Simon

and Francis, 1988). Accordingly, the basis for the competition to obtain the
audits of such companies is not audit price, but the type of opinion that the
auditor can give the client. The propensity to change auditors for those auditees
who received an audited opinion in 1987 was not greater than those with ‘clean’
opinions (Chi sq.
=
0.55,
p
=
ns).
However, including these ‘qualified’
auditees in the sample may bias the results towards rejecting the hypothesis
that new auditors charge less than incumbent auditors. To control for this effect,
all
companies receiving a qualified audit opinion in 1987 (the year in which
companies in this sample make their auditor change decision) were excluded
from the sample, and the regression was re-estimated. The results were similar
to
those in Columns A and B of Table 4. These results indicate that ‘opinion
shopping’ is not driving the findings of this study.
The Association Between Audit and Non-Audit Services
In an issue related to the setting of fees, the relationship between non-audit
and audit services needs further examination. To this end the model was
respecified in two ways using as the independent variable
(1)
the fee (with loglo
transformation) for non-audit services and,
(2)
the total non-audit and audit
fee (with loglo transformation). Results show that the change variable was

associated with an
increase
in both the non-audit fee and total non-audit and
audit fee for the client. This increase is weakly significant (non-audit service
fees,
T
=
1.757,
P
=
0.080, total audit and non-audit fees,
T
=
1.615,
P
=
0,108).
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AUDITOR SWITCHING: THE PRICING
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337
There are at least two plausible explanations for the result for the Big
8
auditees. It could be that the auditor switch was made
so

that auditees could
avail themselves of the greater expertise in the provision of non-audit services
by the Big
8
firms to which the change was made. That is, the non-audit service
expertise was a
cam
of auditor switching. Alternatively,
it
could be that the
auditors were able (and motivated)
to
sell
the new clients
a
greater level of
non-audit services than the incumbents,
so
that the non-audit services were
a
result
of
the switch.
If the first alternative is correct,
it
provides
a
new explanation for auditor
switching (availability of considerable non-audit services), in addition to the
one based upon the lowering of audit fees. If the latter explanation is correct,

it
suggests that there is a close relationship between the fees charged for audit
and non-audit services, and that the fee for one service may not be independent
of the other. Clearly both possibilities warrant further investigation.
Industry (Mining) Effect
As
can be seen from Table
2
a
high proportion of the total sample (52%) and
of both the auditor switch (65%) companies were to be found in one industry
grouping
-
mining.
So
as to
test
for a possible interaction between industry
(mining or non-mining) and auditor change, the audit fee model noted above
was tested for each of these two industry groupings. As observed in Table
4,
the industry dummy variable was significant, suggesting some difference
between these two types of auditees. The results are shown in Table 5.
While differences do exist between the two industry groupings (note in
particular differences relating to the significance of the risk and auditor size
variable), no difference exists between the two groupings in respect of the
dependent variable. This result does, however, suggest the need for further
audit
fee
research which focuses on either risk or audit size (and the related

issue of auditor class premiums)
so
as to incorporate industry effects.
SUMMARY OF FINDINGS AND LIMITATIONS
The results of this paper reject the proposition that new auditors will charge
significantly less than incumbent auditors. These findings seem not to be driven
by the existence of quality premiums or ‘opinion shopping’. However,
it
is
observed that auditor switching is associated with increases in the total
of
audit
and non-audit service fees paid to the auditor.
The finding is subject to a number of limitations. In particular, to the extent
that there
is
multi-collinearity between the hypothesis variable and the control
variables, the failure to observe price-cutting may have simply been due to
an
inability to adequately segregate the effects of different factors upon the audit
In addition, one should note that the sample
of
companies changing
auditors
is
not particularly large (which is
itself
consistent with no sizeable
8
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338
BUTTERWORTH AND HOUGHTON
Table
5
Results
of
Regression Analysis
for
Audit Fees in 1988 by Industry
Grouping
Independent
Variables
N=
~~ ~
Expected
Mining Non-mining
Sips
Companies Companies
Auditor a
-
-0.002 -0.041
Change
b
7.267 -0.455
C
0.972 0.650
Size a

+
0.337 0.279
b
4.186 6.514
C
0.000
0.000
Complexity a
+
0.315 0.469
b
0.808 6.719
C
0.000
0.000
Risk a
+
0.044 0.154
b
2.175 2.629
C
0.420 0.010
Big
81
a
+
0.104 0.048
Non-Big
8
b

3.755 0.808
C
0.031 0.421
Non-Audit
a
+/-
0.140 0.156
Services
b
-4.775 3.406
c
0.000
0.000
Constant
-
1.223
-0.815
-4.775 -3.386
0.000
0.001
Adjusted
R2
64.4% 71.5%
F-Ratio
42.8 54.1
Ndrs
a
=
regression co-cllicicnt, b
=

t-statistic, c
=
lcvcl of significance.
I.
Vuriuble
Measures:
Audit Fccs
=
log,,, of published audit fees. Sizc
=
log,,, book valuc of
;iuditcc’s total asscts. Complexity
=
number
of
subsidiarics
+
1.
Risk
=
dummy codcd
I
if
auditcc
rcccivcs an audit qualification. Auditcc Industry
=
dummy codcd
I
if
auditcc is in the Resourccs

Scctor. Auditor Size
=
dummy coded
1
if
auditor is in the Big
8.
NAS
Provided
=
log,,, of dollar
\.aluc
of NAS providcd. Hypothcsis Variable
=
dummy coded
1
if
auditec changed auditors bctwccn
1987
and
1988.
2.
Tests:
Where an
a
priori
expectation could be made about the effect of a variablc
on
audit fccs.
B

onc-tail
trst
was uscd for significancc.
observations could be increased by examining auditor switches over more than
one year. While this is
so,
this would raise the possibility
of
introducing other
confounding variables (because
of
the use
of
multiple years). Thirdly, these
results may not be generalisable to the rest
of
Australia, and other developed
nations that have
a
free market
for
audit services. Some
of
those who supply
the audit market in Western Australia argue that this regional market is unique
in
a
number
of
ways.36 Fourthly, given the structural change since 1988 in

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AUDITOR SWITCHING: THE PRICING
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339
the auditing profession, and the changes in the general economic climate,
it
is difficult to extend the findings
of
this cross-sectional study beyond the confines
of the period examined. Fifthly,
it
is possible that the present study
underestimates the impact of the extent
of
price-cutting because of difficulties
in measurement. In particular it is possible that the market pressures on audit
fees are rather more subtle than can be measured through the relatively crude
auditor change variable.
For example, audit tenders that result in the incumbent auditor being re-
appointed will not be shown as
a
change in auditor and any reduction in price
via that process will be shown as a fee cut by an incumbent auditor. Even more
subtle and arguably more common are market pressures which do not flow
through to the formalities

of
an audit tender. Anecdotal evidence suggests that,
within the Western Australian market, there are examples
of
client pressure
(including the use of a threat to go to tender) that result in fee cutting by the
incumbent auditor. Both of these factors, an incumbent winning the tender,
and more subtle client pressure, are likely
to
result in the change variable in
this study underestimating the general presence
of
audit fee cutting.
POLICY IMPLICATIONS: THE QUALITY
OF
SERVICE AND AUDITOR
INDEPENDENCE
A number of authors have argued that price-cutting can lead to
a
lack of auditor
independen~e.~’ This is on the grounds that
if
an auditor has made a
significant investment (by way
of
cutting the price for the initial audit) then
in the event of a disagreement with an auditee, that auditor will be inclined
to make
a
concession to the client rather than lose the investment (Simon and

Francis, 1988). Such an argument is in conflict with conventional economic
wisdom: economists would see the initial price discount as
a
sunk cost which
should not be
a
factor in the further decision making of rational economic agents.
Further, as stated above, the quasi-rents that auditors can obtain from
incumbency may act as a bond on their behaviour. As has already been shown,
the value of this bond decreases when an auditor engages in non-independent
behaviour. This penalty should minimise any lack of independence arising out
of pri~e-cutting.~~
Nevertheless, the results of psychological research by Artkes and Blumer
(1985) indicate that auditors may actually take sunk costs, such as those caused
by price-cutting, into account when making decisions. This may be because
they over-estimate the ‘magnitude and certainty of future audit fees and
underestimate losses related to independence impairment’ (Simon and Francis,
1988).
To
this extent, the question
of
independence-erosion raised by price-
cutting has been of intense interest
to
some regulators (Simon and Francis,
1988).
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340
BUTTERWORTH AND HOUGHTON
However, the primary results
of
this study reveal the lack of
a
general
presence of price-cutting. Thus, at
a
general (market-wide level) the
independence issue would not be seen as critical. However, of very real concern
is the observed association between audit and non-audit fees. An association
between these fees (for example, the growth
of
non-audit service fees as a result
of audit fee cutting) may raise concerns about aspects
of
the quality and
independence of audit work that have not
so
far been directly debated
or
researched.
CONCLUSION AND PROPOSALS FOR FUTURE RESEARCH
The issue investigated by this paper is whether
or
not auditor change is
associated with a downward revision of the price for audit services, that is ‘price-
cutting’.

A
review of the relevant literature showed that theoretically, price-
cutting is plausible, and that it has been a real empirical phenomenon in certain
places and at certain times.
To
consider the problem, the specific issue addressed
is that, in a given year, the audit fees charged by auditors who are on their
first year of an engagement will, all other things being equal, be significantly
lower than those charged by incumbent auditors. The method employed
identified the factors that had to be controlled
for,
presented the statistical
hypotheses to be tested in the study, and outlined the data selection task. The
data analysis undertaken using this research methodology showed that as
a
general phenomenon, price cutting was not observable, that is, there is no
general, system-wide price-cutting.
The results of this study give rise to
a
number of proposals for future research.
An obvious extension would be to replicate the study using samples of companies
from other locations and other time periods,
so
as to determine whether the
results reported here are sample specific,
or
are generalisable to other locations
and time periods. Perhaps of greater import is further research on the apparent
association between auditor fees and those which relate to non-audit services.
It is possible that one can observe the substitution

of
one service (and/or
a
fee
for this service) with the other service. It is also possible that audit fee cutting
may not lead to audit fee rises by an incumbent auditor (as posited by de
Angelo’s theory) but may lead to auditors ‘recouping’ fee cuts by the sale
of
non-audit
service^.^'
NOTES
1
For an example of this see
Ncw
Accountanf
(August
9, 1990, p.3).
2
Examples
of
this anecdotal evidence can be found in
Business
Rruicw
Weekly
uuly
14, 1989,
p.110)
and
Australian
Business

(July
4,
1990, p.70).
The only systematic Australian study in
the auditor switching area
is
Francis
(1984).
3
The theoretical explanation for the possible presence of audit fee cutting for initial audit proceeds
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AUDITOR SWITCHING: THE PRICING OF AUDIT SERVICES
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on the assumption that the market for audit services is competitive. There is considerable recent
evidence to suggest that the market for audit services in recent times, at least within Australia,
is highly competitive and price sensitive. The Australian Trade Practices Commission recently
completed a study
of
the accounting profession in Australia. In respect of the provision of auditing
services the final report of that enquiry states
‘
. . .
the market for both external and internal
audit services is very competitive. Larger audits are usually awarded on the basis of a tender,
with the choice of the auditor depending on a number of factors, such as the expertise of the
personnel, demonstrated understanding of the business, the approach of firm processes to

adopting the audit as well as the price. It is of some importance that the price does play some
role in the competitive process for these professional services.’ (TPC, 1992, pp. 22-23). Given
this evidence
it
would be unreasonable to believe that the market for audit services operates
monopolistically
or
more reasonably, oligopolistically. Based on this evidence the assumption
of a competitive market
for
audit services appears sound.
It
should also be noted that the TPC
enquiry found no evidence that there were industry-specific differences in this level of competition.
However, the issue of industry-specific audit fee determinants
is
dealt with in the fourth section.
4 See, for example,
Business
(ApriVMayIJune, 1985, pp.
50-53)
and Dunstan (1983).
5
See REC
1,
Rules
ofEthical
Conducl
-
General

(para. 28), for ethical rules relating to the pricing
6 Note that a quasi-rent is not necessarily a monopolistic rent. See de Angelo (1981a, p.116).
7 This is the only directly relevant Australian study on price-cutting in the Australian audit market.
However, readers should also note Francis and Stokes (1986) on audit prices and product
differentiation.
8
For example Davison et al. (1984) found that companies that had shared directors tended to
have the same auditor. Therefore
it
is logical that the presence of a change
of
directors may
give rise to a change in audit fees.
9
It
is however true, one may wish to generalize beyond this population
of
cornpanics to other
groups of auditees.
10 See AUS 1,
Stafmmt
ufAudifing Standards
and AUP 14.
Statement
of
Auditing Practice
-
Audit
Eoidence
for an outline of the tasks that must be performed by the auditor.

11 The level
of
internal audit may also affect the external audit fee. However, both Gerrard et
al. (1986) and Chung and Lindsay (1985) explicitly addressed the issue
of
internal audit. They
found that the internal audit function did not significantly impact upon the external audit fee.
of audits.
12 For example, Simunic (1980), Taylor and Baker (1981) and Francis and Simon (1987).
13
See for example Simunic (1980).
14 The nature of risk associated with auditees is often addressed in the existing relevant literature
but there is frequently confusion as to whether
it
is ‘audit risk’
or
‘business risk’ that is being
assessed. The theoretical and measurement issues involved go well beyond the domain of the
current paper and are the subject of further work by the current writers and another researcher.
15 For example, see Gerrard et al. (1986).
16 For example, Francis (1984) concludes that Big
8
firms charge higher prices
for
the audit of
17
Compare Francis (1984) and Francis and Stokes (1986).
18 Note that there is a problem with this approach, in that the standard linear regression assumption
of
lack

of
variable measurement error may not be met in this study (Gerrard et al., 1986).
19 See Schedule
5
to the Corporation Regulations, c1.27. The
Rcgulafions
also require that firms
disclose the dollar amount of NAS purchased from their auditor.
20 During 1988, the major
or
first tier of audit firms in Australia contained: Arthur Andersen
&
Co.,
Arthur Young, Coopers
&
Lybrand, Deloitte Haskins and Sells, Ernst
&
Whinney,
KPMG Peat Marwick Hungerfords. Price Waterhouse and Touche Ross. These are referred
to as the Big
8.
21 An alternative, and possibly superior measurement, based on segment reporting was not
available.
22 See for example: Simunic (1980), Palmrose (1986a) and Francis and Simon (1987).
23 Two classes
of
audit qualification exist in the ASC data file. One covers all ‘non clean’ opinions;
the other only serious qualifications (unable to form opinions, going concern, etc.) whilst both
represent audit risk, as the former covers a wider proportion of potential risk situations, and
therefore this measure was used.

24 For example, Simon and Francis (1988) use the ratio of receivables plus inventories to total
both small and large auditees.
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BUTTERWORTH AND HOUGHTON
assets to control for risk. However, this variable could be a proxy for auditee complexity. When
the auditee becomes more complex and its operations more dispersed, it may be harder for
central management to maintain an adequate control over inventory and debtors. Therefore,
as complexity increases,
so
too could the value of this ratio. Simon and Francis did in fact
find a significant positive correlation between this variable and their complexity variable.
25 In an extension on this present study, the authors intend to substitute a different measure for
risk, that being the Australian Securities Commission Corporate Failure Prediction Index (a
Z-score type of index measure). This may be a more sensitive and competent measure of risk
than the simple clean/qualified audit opinion.
26 The data represents the population of W.A. companies, and to the extent they are representative
of Australian companies generally, the results are valid of this wider set of companies.
It
should
be noted, however, that the W.A. companies are generally smaller in size than their Eastern
counterparts.
27 Note that
(3),
(4)
and

(5)
all relate to (legible) data accessibility. Permission to use the dataset
was given by the then Western Australian Government Department
of
Corporate Affairs. Access
was
on
a strictly confidential basis (company files were identified by
a
confidential code
-
not by name). Changed administrative arrangements in 1989-90 meant that that department
was disbanded and the regulatory process was taken over by a Federal Government
instrumentality. Further access in a way that could match data to the original dataset became
impossible after that change.
28 The Mann-Whitney U-test was used to test for differences between the continuous variables
for
the change and non-change groups. Significant differences between the nominal variables
for the change and non-change groups were examined using the Chi-Squared test adjusted
for continuity.
29 The Kolgomorov-Smirov one-way test could not reject the null hypothesis
of
normally distributed
residuals at any level of significance.
A
Goldfield-Quandt test was used to check for any
heteroscedasticity. Using a procedure similar to other researchers in this area (for example,
Simon and Francis, 1988; and Turpen, 1990), separate regressions were estimated for the upper
and lower
40%

of the sample based
on
predicted values of log,, (audit fee). The sums
of
squared residuals for these two regressions are then tested for equality using a F-ratio hypothesised
as being equal to one. The resulting F-ratio indicated that the null hypothesis of the equality
of the two regressions cannot be rejected at a level of
Q
-
0.05,
and therefore, the residuals
for the overall regression can be said
to
be homoscedastic.
30
Companies generating standardised residuals greater than 2.0 were identified. These cases were
dropped from the sample, and the audit fee model re-estimated. The results were similar to
those reported in Table
4
and the conclusions that would be drawn from the results would
be unchanged.
31
The Pearson product-moment correlations indicate that there is no evidence of problematic
collinearity between the hypothesis variable (auditor change) and the control variables. Each
correlation being
<
0.15. Some higher correlations exist between the size variable over control
variables (including auditee complexity and auditor size). However, such correlations do not
effect the relationship between audit fees and auditor change. Additional regressions were
executed with each of the control variables with correlations greater than 0.2 being removed

from the analysis. No change in the hypothesis variable results was found.
32 Cook’s distance was calculated for each
of
the most extreme observations and none was found
to have an undue influence on the direction of the regression.
33 To see how this bond might work, consider a situation where the auditor discovers that the
auditee has not been keeping accounting records in accordance with the rules specified by claim-
holders, The client might try and induce the auditor into the unprofessional behaviour of not
reporting this breach. However,
if
the auditor cheats in this way, and is found out, it will lose
quasi-rents as a result of clients leaving and other clients being prepared to pay less for the
services of that auditor. The auditor has an incentive to prevent this
loss
by acting professionally
and reporting the breach (de Angelo, 1981b).
34
However, see note 28.
35 Some would argue that the number of observations of auditor switching
or
change can be
extended by examining the phenomenon over several years. While such an extension would
have this effect it would also have the potential effect of introducing unknown and possibly
non-trivial confounding effects.
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AUDITOR SWITCHING: THE PRICING OF AUDIT SERVICES

343
36
This information was provided to the authors by a past president of a major Australian accounting
body with extensive experience of auditing throughout Australia. An example of this uniqueness
is the large proportion of listed W.A. companies which are audited by Non-Big
8
firms.
37
See for example Hermanson et al.
(1987).
38
See also Magee and Tseng
(1990),
who show that the presence
of
the quasi-rents available
to incumbent auditors should prevent auditors taking non-independent actions in most situations.
39
The relationship and possible interchangeability of audit and non-audit services is an issue
under current investigation by the present writers.
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