FAR Literature Review: The effect of mandatory fee disclosure on subsequent audit pricing and audit quality
This literature review synthesizes the current body of academic research on mandatory fee disclosure, with a focus on its effect on audit pricing and audit quality. While extant studies demonstrate that public fee disclosure has an impact on subsequent audit pricing, evidence on its impact on audit quality is inconclusive. Most research cited relies on archival data from listed firms in Asia and the US which leaves gaps in our understanding of the impact of mandatory fee disclosure in audit markets dominated by privately held firms. Private companies, however, constitute world-wide the majority of companies. Specifically, in continental European countries, such as the Dutch audit market, private companies make up over 99 percent of audited companies. Because private firms differ from listed firms on a number of important dimensions (e.g., exposure to market forces, nature of agency conflicts, information environment, it is ex ante unclear whether results from listed firms are generalizable to private firms. As part of the FAR Replication Program, our project aims to address this research gap: by replicating existing studies that investigate the impact of mandatory fee disclosure in the context of listed companies (i.e., Francis and Wang (2005) and Chen et al. (2019)), our FAR replication project explores the actual consequences of the mandatory disclosure of fees on audit pricing and audit quality in the Dutch audit market, which is predominantly composed of private firms. To do so, we formulate several research questions that will be studied throughout our FAR replication project. Further, we elaborate on the methodology that we will employ and our anticipated contribution. Our review offers valuable insights for academics, regulators, and practitioners interested in the consequences of mandatory fee disclosure on audit pricing and quality. Specifically, our study contributes to the academic literature examining the real effects of disclosures. Regulators should be interested in our findings in case there are consequences—whether intended or unintended—to audit pricing and audit quality. With respect to practical implications, our study provides an analysis on the potential increased bargaining power after the regulatory implementation of mandatory fee disclosure.
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