Customer-Base Concentration and Audit Pricing

Abstract

This paper examines whether and how auditors’ pricing decisions are affected by their clients’ customer base. We first document that customer concentration is negatively related to audit fees. This negative relationship is stronger for clients whose customers have higher costs of switching suppliers and clients who have high relationship-specific investments with their major customers. The effect of concentrationon fees also depends on which stage of the firm life cycle the firm is in. The discount is strongest for firms in the growth and maturity stages, and there is actually a fee premium for firms in the decline stage. These results are robust to several robustness tests. In additional analyses, we find that customer concentration is associated with a lower likelihood of accounting restatements, indicating higher audit quality.