Long-Term Audit Pricing Dynamics Under Mandatory Fee Disclosure: Evidence from an Exogenous Shock

This study examines the long-term evolution of audit pricing dynamics in a market characterized by continuous audit fee disclosure. Using data from the Dutch audit market over the period 2008-2019 and exploiting the 2014 EU Audit Reform as an exogenous fee shock, we analyze how audit fees adjust to prior-year mispricing. We find that audit fees exhibit mean-reverting behavior, with both overpricing and underpricing associated with subsequent fee adjustments. Further, results show that an exogenous fee-increasing shock temporarily increases fee dispersion. Under continuous fee disclosure, the availability of post-shock fee information facilitates pricing adjustments, with downward fee adjustments in the subsequent year. While bargaining power between auditors and clients is symmetric on average, clients exhibit stronger bargaining power in the one to two years following the fee-increasing shock. Taken together, our findings highlight the role of fee transparency in facilitating price adjustments and restoring pricing efficiency over time.