AUDIT LITIGATION AND THE PRICING OF AUDIT SERVICES

AUDIT LITIGATION ANDTHE PRICING OF AUDIT SERVICESbyTeo Eu-JinandKeith A. HoughtonThe University of MelbourneVictoria, 3010 AustraliaCorrespondence can be directed to:Email: k.houghton@ecomfac.unimelb.edu.auFax: +61 3 9349 2397November 2000AcknowledgementsThis paper has benefited from the helpful advice and comments of Christine Jubb, Harold Luntz, IanMalkin (all of The University of Melbourne), Daniel Stepniak (University of Western Australia),Keith Alfredson (Chair of the Australian Accounting Standards Board) and two anonymous refereesfor the 2001 American Accounting Association Mid-Year Conference.AUDIT LITIGATION AND THE PRICING OF AUDIT SERVICESABSTRACTThis paper examines the impact of audit litigation on audit fees. It is argued that thereputation of an audit firm is correlated to the perceived audit quality provided. Audit qualityis related positively to audit fees ceteris paribus, and audit litigation impacts on reputationnegatively because it may be seen as an indicator of a lack of audit quality.The negative association between audit litigation and audit fees suggested is argued to beexacerbated by, (1) locality; and (2) auditor industry specialization factors. It is argued thatlitigation against a national audit partnership concerning an audit carried out by a particularstate office will have a more marked effect on local market fees than on the audit firm’s feesnationally. Arguably, this is because of the presence of audit ...