Non-Switching Audit Clients’ Response to Audit-Office Audit Failures: Evidence From Audit and Non-Audit Fees

This study examines the association between audit-office audit failures and non-switching client audit and non-audit fees. A non-switching client remains with the same audit office from the previous year to the current year. We posit that non-switching clients may not want to reduce audit fees after an audit-office audit failure because doing so may lower investor perceptions of auditor independence and financial reporting quality. However, they might want to lower non-audit fees because it can improve perceptions of auditor independence and financial reporting quality. Consistent with this notion, we fail to find an association between audit-office audit failures and changes in audit fees, but we do find a decrease in non-audit fees. The results of cross-sectional analyses suggest that non-switching clients are unwilling, not unable, to pressure the audit office to reduce audit fees. Our results are consistent with the idea that non-switching clients respond to audit-office audit failures by using audit and non-audit fees to maintain perceptions of auditor independence and financial reporting quality.