Are big 4 audit fee premiums always related to superior audit quality? evidence from India’s unique audit market

Abstract

In this study we examine the fee premiums earned by Big 4 auditors (B4As) in India. We then try to determine the primary cause of the fee premiums in an Indian context. The B4As charge fee premiums for two primary reasons. First they are considered to be a potential indemnifier of losses for the stakeholders of the company. Second they provide a better quality of audit which improves the quality of reported earnings. Since the legal regime in India in significantly less stringent and the risk of auditor litigations is relatively low, B4A premiums in India are most likely to be driven by the need for superior audit quality. The results of our analysis indicate that B4As earn significantly higher fees than Non-Big 4 auditors (NB4As) in India. However there is no difference in the quality of audit provided by the B4As and NB4As as evidenced by the quality of reported earnings. Our results also indicate that B4As earn significantly higher abnormal fees. However, unlike the results of prior research, such abnormal fees are not associated with reduction in the quality of audit and reported earnings. After eliminating the two primary causes of B4A fee premiums, we posit that the need for B4As in India is primarily driven by the need to “signal” a superior quality of reported information.