The Level of Audit Fees at Auditor-level and Audit Quality*

This study investigates the association between small and medium auditors’ (audit firms’) audit pricing policy and audit quality. Especially, this study examines whether auditors that charge high audit fees on average are likely to provide high-or low-quality audit service to their clients, compared with other auditors that do not charge high audit fees on average. If high audit fees enable the auditors to retain enough resources, such as recruiting and retaining high-quality personnel, it is likely that the auditors provide high-quality audit service. In contrast, if clients pay high audit fees in return for impaired auditor independence, the audit quality is expected to be lower. Empirical findings are summarized as follows. First, auditors with high pricing policy tends to provide low-quality audit services, compared with auditors with low pricing policy. Second, for auditors with high pricing policy, we find that the auditors provide equally low-quality services to clients that pay relatively low audit fees, compared with other clients that pay relatively high audit fees. Third, for auditors with low pricing policy, we find that the auditors provide equally high-quality services to clients that pay relatively high audit fees, compared with other clients that pay relatively low audit fees. In sum, these findings suggest that small and medium auditors maintain a similar level of audit quality at the auditor-level, regardless of the level of audit fees of individual audit clients. Considering that prior studies rarely look into audit quality at the auditor-level, these finding provide important implications into the determinants of audit quality.