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

• 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
• ISSN: 0306-686X; 1468-5957
• DOI: 10.1111/j.1468-5957.2007.02052.x

:  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.