Auditor's Engagement Risk and Audit Fees: The Role of Audit Firm Alumni

:  This study explores the effect of the association of audit firm alumni with their alma mater on audit prices. The tests indicate that there is a moderate reduction of up to 21% in the level of audit fee when alumni (i.e., former employees) of the incumbent audit firm sit on the client board of di...

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Bibliographic Details
Published in:Journal of business finance & accounting 2007-11, Vol.34 (9-10), p.1393-1422
Main Author: Basioudis, Ilias G.
Format: Article
Language:English
Subjects:
Accountants
Accounting
Accounting firms
Alumni
Audit engagements
audit fees
audit firm alumni
Audit risk
Auditing
auditor's engagement risk
Audits
Business studies
Directors
executive and non-executive directors
Finance
Risk management
Risk theory
Studies
United Kingdom
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Summary::  This study explores the effect of the association of audit firm alumni with their alma mater on audit prices. The tests indicate that there is a moderate reduction of up to 21% in the level of audit fee when alumni (i.e., former employees) of the incumbent audit firm sit on the client board of directors which is consistent with the engagement risk theory. This suggests that there is an ‘alumni effect’ in the market for audit services. The findings hold only in the large company segment of the market. The results are robust to different model specifications and alternative samples. The sample comprises all executive and non‐executive directors who run the UK quoted companies and are simultaneously ICAEW qualified chartered accountants. The study's implications for the accounting profession and the regulators are also discussed.
ISSN:0306-686X
1468-5957
DOI:10.1111/j.1468-5957.2007.02052.x