Audit Pricing: A Theoretical Analysis And Empirical Research

Independent audit industry has dual responsibilities: one is related to protecting public interest, lower agency cost of companies and improving the capital market efficiency; the other is about gaining profit for maintaining survival and the development of the auditing industry. It is doomed to be special by this dual interests system (both the public interest and industry interest) . Such a system makes the pricing mechanism of audit product much more complicated than normal commodity, sometimes even shows all kinds of conflicts. We can say, there is never such an industry like independent audit, which gets economic interest from the auditees but protects the interests of those who don't pay. Security market attracts general public and see their interests as most important, the conflicts are therefore congregated, enlarged, extended and even incandesced in such a market.The audit pricing in security market is more than the economic relationship between listed companies and auditors, it also hides the interests and conflicts between them. The audit pricing problem involves the conflicts and harmonizations between public interests and industry interests; it also involves the close but complicated relationship between audit industry interest and professional ethics. It attracts the attention of monitory institutions all over the world, and became the hot topic in academic world.If we see the new security market as a whole, the audit pricing in China shows two extreme behavior patterns: in one hand, low concentration in China market and hard competition on pricing made the price brokerage popular; in the other hand, the big four enjoys the super-citizen benefits and obtained high "audit premium", the local audit companies lack a good developing environment. Why two pricing system exist in Chinese audit market? Where does the audit premium of big four come from? Is audit pricing brokerage the same as "low balling"? To answer these questions, the previous researches usually focus on the financial ratios and company characters; there is never one systematic analysis have been done in this field. Moreover, the audit pricing research in China should not neglect the influences of government supervision behavior. Since the development of security market is directly driven by government, naturally the government behavior would deeply influence the audit market size and structure, even the competition situation, and the supervision of government on audit pricing also have a long history. Are these supervision policies effective? Could government directly control pricing? The audit fee is decided by government regulation or by market? These special pricing questions in our security market need to be analyzed and discussed. This paper is aimed at summarizing the above questions and exploring the possible reasons, providing evidences for policy making and providing research basis for further research, and discuss the future development of independent audit industry.The main contents of the dissertation are divided into three parts.Firstly, to develop an analytical model of audit pricing. According to the audit pricing model, and combined the influence factors of audit pricing, we summarized four constrain conditions and developed an analytical model of audit pricing which is more suitable for Chinese security market. The four conditions are cost, demand, competition and regulation. They are the substitute variables for audit supplier, user, competition behavior of supplier and regulator respectively. The analysis procedure in this paper has two levels: one is theoretical analysis for cost, demand, competition and regulation, the other level is the quantitative analysis by using Chinese data.Secondly, to analyze the pricing behaviour of big four. Reviewing the pricing behavior of big four. For which, we analyzed the cost structure, demand characters, competition behavior and premium sources of big four. Our aim is to find out how the big four get the audit premium, and provide the theoretical backup for developing local audit companies, and provide empirical evidence for policy makers.Thirdly, to analyze some auditing pricing problem. Because our security market is still in developing, old problems exist and new problems come out at the same time, for example, the audit price brokerage, the non-audit service, pricing alliance etc. these problems have important influences on audit quality and market structure. Therefore these questions are all covered in this paper.On the whole, the contributions of this paper are: First, summarized all kinds of influencing factors into four parts, and examined these four parts respectively, which made the audit pricing research more systematic; Second, by taking references of the latest research results, and considering Chinese real practices, by setting up a systematic and completed theoretical framework, this paper examined the real problems by using positive research. Third, we drawed some interesting conclusions which maybe helpful to China's auditing industry: (l)The conflict between quasi-public goods quality of audit product and private pricing mechanism leads to the audit pricing paradox, which is the basis of making the audit principal as the payer, and also the starting point of related research questions in audit area.(2)No significant evidence shows that the audit premium of big four come from product differences and market power, therefore the premium big four get from Chinese market possibly come from regulation rent which due to government preferences.(3)Because of the particularity of audit product, the popular government price controlling model is not suitable for audit pricing control. In practice, directly price control (showed as lowest price constraint) can hardly reach the expected aim. Thereby, as a whole, audit product pricing can hardly regulated or controlled by government.Because of the complexity of audit pricing, this paper tried to analyze the four parts mentioned above, but the four parts often influenced each other, there might be some endogenous variables. Although we have tried to control these influences, but the best solution is from developing the systems dynamic model, simulating the influences of endogenous variables by using computer program. Controlling endogenous variables and using new research method, for example the systems dynamic model, would be the further research direction.