Do Auditors Discount Fees During the First Year of Engagement?

SUMMARY This article summarizes and highlights the implications of the published study “Are audit fees discounted in initial year audit engagements?” (Barua, Lennox, and Raghunandan 2020) (BLR). The paper draws attention to the fact that most prior studies that have examined audit fees for initial-year engagements have overlooked two unique issues in measuring audit fees: (1) the SEC requirement for the disclosure of fees paid only to the successor auditor and (2) most of the auditor changes occur in the second or later fiscal quarters of the year. BLR show that once these two factors are taken into consideration, evidence does not show systemic fee discounts for first-year audit nor any reduction in audit quality when such fee discounts occur. The results of this study have significant implications for audit practice, academia, and regulators, given longstanding concerns by legislators and regulators about the possible deleterious effects of initial-year audit fee discounting.