Creative Commons

The principal aim of our study is to amass empirical evidence for the effects that audit market competition and product market competition have on audit pricing. Audit markets are defined in the context of the industry segments and the US Metropolitan Statistical Areas where these markets are operative, and an auditor’s industry location is specified relative to the auditee, that is, we determine, for each case, the auditor– auditee industry alignment. Using audit fees data for the years 2003 through 2010, we document a positive correlation between audit fees and product market competition (competition between auditees), but a negative correlation between audit fees and audit market competition. We also investigate the link between the spatial clustering of auditees in urban agglomerations and the level of audit fees charged by auditors. We find that the size or the centrality of the city where an auditee is headquartered correlates positively with the audit fees they pay. After calculating the distance from each auditee headquarters to the central offices of the Security Exchange Commission, we find that auditees located closer to Washington, D.C., pay lower audit fees. Finally, we include in our model the 150-hour education requirement to sit for the CPA exam in the US. We find that audit fees have steadily increased since 2000, the when this education requirement was first implemented.