The Big Four firms impose greater fees as the length of time grows that they’re auditing companies, according to a new academic study.

Big Four audit fees increase on average by 13 percent between the first year and the second, according to the new study, by about 22 percent between the first year and the third, then creep up to 28 percent above the original fee by year 12 and 32 percent above it by year 14. Among the first 21 companies of the Dow 30 to release their reports this year, the average auditor tenure was 66 years.

The study, by professors Aloke Ghosh and Subprasiri Siriviriyakul of Baruch College of the City University of New York, appears in the June issue of Accounting Horizons, published by the American Accounting Association. “Big Four audit firms earn quasi rents [the magnitude of which] increases with tenure because Big Four audit firms charge a sizable tenure-linked fee premium ... and [also] because less audit effort is needed to provide the desired level of assurance as tenure lengthens,” they wrote.

Audit fee increases

The pattern of fee increases stands out for the Big Four. Of the hundreds of smaller accounting firms sampled by the researchers, audit fees on average stayed approximately flat or even fell slightly as audit tenure lengthened.

The researchers found the fee increases imposed by the Big Four firms couldn’t simply be attributed to larger workloads that might occur as their corporate clients grew or become more complicated, since the study controlled for those factors.

Instead of the workloads growing over time, average work requirements actually fell as auditor tenure increased. The researchers looked at “audit report lag,” the amount of time from the end of a company’s fiscal year until the issuance of its annual financial report. The professors reasoned that period of time should “become shorter as audit firms are able to complete audit testing more efficiently and provide the desired level of assurance with less audit effort.” But after controlling for a variety of factors that could affect audit workload, the researchers found that audit report lag diminished as tenure lengthened, declining by approximately 6 percent between years one and three, around 10 percent by year five, about 14 percent by year six, and 16 percent by year nine.

“Big Four audit firms charge a sizable tenure-linked fee premium [even as] less audit effort is needed,” said the paper. “Although audit costs decline with longer tenure for non-Big Four firms, they tend to offer a tenure-linked fee discount which offsets some of the benefits of lower audit costs … Ultimately, the benefits of longer tenure, if any, are relatively small for non-Big Four audit firms.”

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Michael Cohn

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.