Audit Effort and Fees Under Concentrated Client Ownership: Evidence from Four International Audit Firms

Using proprietary audit hour and fee data from the internal records of four international audit firms in Finland, this study examines the impact of audit client ownership type on audit effort and fees. The main argument is that there are differential effects of ownership concentration depending on the particular nature of concentrated ownership (i.e., firms in which the majority of shares are manager-owned versus foreign-owned versus state-owned). Consistent with this, the paper documents that audit hours and fees are lower for the companies majority-owned by their management and higher for the subsidiaries of foreign companies than for other firms. However, no difference between the companies owned by the state or municipalities and the companies with more diverse ownership structure can be found. This suggests that governmental ownership is actually closer to dispersed than concentrated ownership structure in terms of audit quality. The results also show that replacing the variable indicating majority-ownership with the variables capturing the type of a controlling owner increases the explanatory power of the models significantly, which demonstrates the importance of ownership type in the production and pricing of an audit. The findings have important implications for those examining audit markets with client firms owned by different types of controlling shareholders.