Audit Fees

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Audit Office Size, Audit Quality and Audit Pricing
By Jong-Hag Choi, Chansog (Francis) Kim, Jeong-Bon Kim, and Yoonseok Zang

Forthcoming at Auditing: A Journal of Practice and Theory

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*Jong-Hag Choi is an Associate Professor at Seoul National University (acchoi@snu.ac.kr). Chansog Kim is an Associate Professor at City University of Hong Kong (acckim@cityu.edu.hk). Jeong-Bon Kim is a Chair Professor at City University of Hong Kong (achead@cityu.edu.hk). Yoonseok Zang is an Assistant Professor at Singapore Management University (yszang@smu.edu.sg). We thank Jay Junghun Lee, Annie Qiu, Haina Shi, Byron Song, Catherine Sonu and participants of research workshops and doctoral seminars at City University of Hong Kong, Korea Advanced Institute of Science and Technology, Seoul National University, Singapore Management University, and The Hong Kong Polytechnic University. An earlier version of the paper was presented at the 2008 AJPT/JCAE Joint Symposium and the 2008 Korean Accounting Association Annual Conference. Special thanks go to Dan Simunic (the editor), Michael Stein (the discussant at the Joint Symposium), and two anonymous referees for their constructive comments and suggestions which lead to a sunstantial improvement of the paper. Jong-Hag Choi gratefully acknowledges financial support from Samil PWC Research Fellowship. Jeong-Bon Kim acknowledges partial financial support for this research from the Social Sciences and Humanities Research Council of Canada via the Canada Research Chair program. The usual disclaimer applies. Correspondence: Jeong-Bon Kim, The Department of Accountancy, City University of Hong Kong, Tat Chee Avenue, Kowloon, Hong Kong (Tel: +852-2788-7901; E-mail: jeongkim@cityu.edu.hk.

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Electronic copy available at: http://ssrn.com/abstract=1011096

Audit Office Size, Audit Quality and Audit Pricing

SUMMARY: Using a large sample of U.S. audit client firms over the period 2000-2005, this paper investigates whether and how the size of a local practice office within an audit firm (henceforth, office size) is a significant, engagement-specific factor determining audit quality and audit fees over and beyond audit firm size at the national level and auditor industry leadership at the city or office level. For our empirical tests, audit quality is measured by unsigned abnormal accruals, and the office size is measured in two different ways: one based on the number of audit clients in each office and the other based on a total of audit fees earned by each office. Our results show that the office size has significantly positive relations with both audit quality and audit fees even after controlling for national-level audit firm size and office-level industry expertise. These positive relations support the view that large local offices provide higher-quality audits, compared with small local offices and that such quality differences are priced in the market for audit services. Keywords: audit office; office size; audit quality; audit pricing.

Data Availability: Data are publicly available from sources identified in the paper.

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Electronic copy available at: http://ssrn.com/abstract=1011096

Audit Office Size, Audit Quality and Audit Pricing
“The way we think about an accounting firm changes dramatically when we shift the unit of analysis away from the firm as a whole, to the analysis of specific city-based offices within a firm. In terms of DeAngelo’s (1981b) argument, a Big 4 accounting firm is not so big when we shift to the office level of analysis. For example, while Enron represented less than 2% of Arthur Andersen’s national revenues from publicly listed clients, it was more than 35% of such revenues in the Houston office.” (Francis 2004, 355) INTRODUCTION As alluded in the above quote, the size of a city-based audit engagement office could be a more crucial determinant of audit quality (and thus audit fees) than the size of a nationallevel audit firm because...
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