The Big-4 Premium in the German Audit Market for Listed and Private Firms

Abstract

The majority of audit fee research has identified that BIG-N audit firms charge higher fees than other auditors. To detect the reasons for such a fee premium in a concentrated audit market it is necessary to compare audit pricing in the concentrated market to pricing behavior in a competitive market. We follow this approach proposed by SIMUNIC (1980) but unlike most researchers we separate the German audit market in a segment for listed and non-listed auditees. This allows us to capture the difference in the amplitude of an audit mandate in a more universal way as well as to separate the audit market in a competitive and a concentrated segment more accurately. Thereby, to our knowledge we are also the first to examine audit fees of non-listed companies in Germany. We observe a fee premium for BIG-4 auditors in both market segments when applying an aggregated BIG-4 variable as well as looking at these audit firms separately. This suggests product differentiation as the root for higher prices and competitive audit pricing refuting regulators' concerns of monopolistic pricing behavior due to a high market concentration. This is supported by a Fee Cutting effect. Furthermore, our results demonstrate that similar to listed firms audit pricing for private firms is influenced by client's size, complexity and risk factors.