An examination of factors driving big 4 audit fee premiums: evidence from India's audit market

Abstract

This study examines fee premiums earned by Big 4 auditors in India and identifies the primary reason for such fee premiums. There are three primary drivers of Big 4 fee premiums. First, Big 4 auditors charge a fee premium for their reputation, which allows their clients to enjoy certain strategic benefits; second, they provide a superior quality of audit, which improves the quality of reported earnings; and third, they are considered to be potential indemnifiers of losses for a company's stakeholders. Since the legal regime in India is significantly less stringent and the risk of auditor litigation is relatively low, Big 4 premiums in India would not be driven by the need for auditors to indemnify losses. The results indicate that Big 4 auditors earn significantly higher fees in India and that clients of Big 4 auditors have significantly higher earnings response coefficients than clients of Non-Big 4 auditors. However, there is no difference in the quality of audit provided by Big 4 and Non-Big 4 auditors as measured by the quality of reported earnings. Our results also indicate that Big 4 auditors earn significantly higher abnormal fees but such fees do not lead to a reduction in earnings quality.