Reference dependence and its implication on audit pricing

Purpose Building on equity theory and reference dependence, this study aims to investigate the association between reference pricing and subsequent changes in audit fees. Design/methodology/approach The authors derive the reference price based on expected audit fees and apply ordinary least squares regression to analyze its impact on future audit fees. In addition, a change-form specification is used to control for potentially omitted client-specific variables, ensuring a clear assessment of the relationship between reference pricing and subsequent audit fees. Furthermore, an entropy balancing procedure and firm fixed-effects regression analysis are incorporated to enhance the robustness of the regression analysis. Findings Using a sample from the years 2000–2018, this study demonstrates that reference pricing significantly influences subsequent audit pricing. Specifically, these findings suggest that clients who perceive their audit fees as unfair, when compared to the reference audit fees, are more likely to receive lower subsequent fees with their incumbent auditors. Results are consistent when using alternative regression techniques and are robust across various subsamples and additional tests. Practical implications This research highlights the importance of reference points in shaping client pricing behavior in the context of audit pricing and provides valuable insights for both audit firms and clients. It suggests that a strategic, long-term approach to fee-setting, which considers clients’ perceptions of fairness relative to reference fees, can enhance client relationships and pricing outcomes. Audit firms should carefully manage clients’ reference points to minimize perceived price unfairness and improve retention. Originality/value To the best of the authors’ knowledge, this study is among the first to examine the critical role of reference pricing in audit fees, a topic that has been relatively underexplored. It enriches the audit pricing literature with valuable insights for both audit firms and clients. By investigating how reference points influence future audit fees, the authors contribute to a more informed decision-making process for all parties involved.