Relative audit fees and client loyalty in the audit market

Abstract

Purpose

The purpose of this paper is to examine the stability or loyalty in the auditor‐client relationship. It explores the association between audit fees and auditor loyalty. Specifically, it investigates whether clients paying less audit fees relative to other companies in their industries are more likely to be loyal to their auditors.

Design/methodology/approach

Logistic and ordinal regression analyses are used to compare loyal clients to clients that switched audit firms after controlling for factors that are expected to be associated with client loyalty.

Findings

Results show that relative audit fees have a significant effect on the degree of loyalty of clients to their audit firms. Additional analysis shows that the loyalty of clients that pay higher audit fees relative to similar clients in their industry are highly affected by increases in audit fees. However, the loyalty of clients who pay lower audit fees compared to similar clients in their industry is not affected by further increases in relative audit fees.

Research limitations/implications

The study does not differentiate between auditor dismissal and auditor resignation in the classification of clients that switched auditors. It also does not classify auditor switches into auditor‐initiated switches and client‐initiated switches.

Practical implications

It is cost effective for clients to stay with the same audit firm. Audit firms should be careful when adjusting their audit fees from one period to another, as there is a higher probability of losing a client, when increasing the audit fees, especially if this client is already paying higher audit fees relative to similar clients.

Originality/value

The findings of this study increase the understanding of how relative audit fees affect client loyalty in the audit market.

Citation

Farag, M. and Elias, R. (2011), "Relative audit fees and client loyalty in the audit market", Accounting Research Journal, Vol. 24 No. 1, pp. 79-93. https://doi.org/10.1108/10309611111148788