The pricing of audit services: evidence from South Africa

Purpose Regulatory interventions to maintain audit quality are intrinsic to the audit market and may affect the setting of audit fees. South Africa is the country that most recently implemented mandatory audit firm rotation (MAFR). This study investigated the determinants of audit fees in this developing country during a period marked by increased audit firm rotations in response to the promulgation of an MAFR regime. The study period encompassed the 2020 COVID-19 year, during which worldwide regulatory interventions were implemented to extend the release of annual financial statements. Design/methodology/approach Determinants of audit fees for companies listed on the Johannesburg Stock Exchange were studied for the 2015–2020 period. Two-way fixed effects and ANOVA regressions were applied to assess the influence of rotations in an MAFR regime as well as of the financial reporting extension granted in the 2020 COVID-19 years, on audit fees. Findings Audit firm rotations under an MAFR regime were found not to have significantly affected the pricing of audit services in South Africa. Contrary to expectation, the audit fees paid by companies eligible for the COVID-19 financial reporting extension did not differ significantly from the audit fees paid by companies which were not eligible for the extension. Practical implications The study identified the deterioration of audit quality and the risk of audit firm failure as possible unintended consequences of the MAFR regime in South Africa. Originality/value This study provides insights into the pricing of audit services in a developing country with an advanced audit industry in a time of regulatory reform relating to MAFR and a financial crisis caused by COVID-19.