Audit Review

Audit Markets, Fees and Production: Towards An Integrated View of Empirical Audit Research

Monika Causholli University of Kentucky

Michael De Martinis Monash University

David Hay University of Auckland

W. Robert Knechel University of Florida

Forthcoming in the Journal of Accounting Literature

21 February 2011

Acknowledgements: We greatly appreciate the input we have received from Clive Lennox, Mike Stein and Don Stokes on an earlier version of the paper.

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Electronic copy available at: http://ssrn.com/abstract=1768199

Audit Markets, Fees and Production: Towards An Integrated View of Empirical Audit Research 1.0 INTRODUCTION The market for audit services has received a great deal of attention from researchers, practitioners and regulators since the 1970s [US Senate 1977; Oxera 2006; GAO 2008; European Commission 2010]. 1 Even when there were eight dominant international firms—compared to the four that currently exist—regulators were concerned about competition in the audit market [US Senate 1977]. This interest in audit markets has spurred a large body of research that examines various aspects of audit contracting, audit pricing and audit production, commencing with the seminal studies on audit fees of Simunic [1980, 1984]. The continual evolution of audit practices, restructuring of the Big N, and significant changes in the regulation of auditing have caused many researchers to explore these issues over the past three decades. Much of this research has addressed issues related to the determinants of audit fees [Hay et al. 2006a], while a smaller body of research has examined audit production (hours) [O’Keefe et al. 1994]. Together, research on fees and production are important because of what they may be able to tell us about the quality of audits [Caramanis and Lennox 2008; Schelleman and Knechel 2010]. Most of the empirical research on audit markets, 2 fees and production has developed with little overall integration or structure so...