Does the Auditor Certification Network Influence Fee Competition for New Clients? Perspective on the Industrial Relatedness of Corporate Groups

ABSTRACT The aim of this study is to investigate whether an audit firm's certification network (hereafter also referred to as audit network) influences auditors' strategies to reduce fees in the competition for new client engagements and whether the influence of the audit network varies according to industry diversity within corporate groups (hereafter also referred to as groups). In addition, the study aimed to shed light on how an audit network influences audit quality. The empirical results suggest that a broader audit network does not lead to winning engagements from existing clients within groups by undercutting fees, regardless of the degree of industry relatedness, and that it also limits the use of discretionary accruals by firms. However, for new clients with a higher degree of industry relatedness, a broader audit network is more likely to win new client engagements through more aggressive underbidding of fees. It is also observed that auditors are more likely to allow these new clients to use negative discretionary accruals to reduce earnings. The empirical results of the study help to understand how audit networks influence audit fee underbidding. They provide insights from the perspective of industry relatedness within groups and thus address the impact of audit networks on audit quality in such an environment.