Auditor Industry Specialization, Client Bargaining Power, and Audit Fees: Further Evidence

Casterella, Francis, Lewis, and Walker (CFLW 2004) find, using survey data from 1993, that (1) there is a Big 6 industry specialization audit fee premium in the small client segment of the U.S. audit market, but (2) audit fees decrease for large companies as the client becomes increasingly large relative to an auditor's clientele. In this study, we first replicate and confirm the results of CFLW (2004), using audit fee data from SEC filings for fiscal 2000 and 2001. In the post-SOX period, we find that the results related to specialization continue to hold in fiscal 2004 but not in 2003—suggesting that 2003 is perhaps a unique year due to the flux in the audit market following the enactment of SOX. With respect to client bargaining power, our results in the post-SOX period differ from CFLW (2004) in that we observe a negative association between client bargaining power and audit fees for both the small and large client segments.