Factors affecting audit fees in Europe: France, Germany, and the UK

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Factors affecting audit fees in Europe:

France, Germany, and the UK

Bahram Soltani

Maître de Conférences,

Université Paris 1 Panthéon Sorbonne, PRISM

Chédia Rekik

Doctorante,

Université Paris 1 Panthéon Sorbonne, PRISM

CR-11-31

PRISM-Sorbonne Pôle de Recherche Interdisciplinaire en Sciences du Management

UFR de Gestion et Economie d’Entreprise – Université Paris 1 Panthéon-Sorbonne 17, rue de la Sorbonne - 75231 Paris Cedex 05 http://prism.univ-paris1.fr/

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Cahiers de Recherche PRISM-Sorbonne 11-31

Bahram Soltani*

Chédia Rekik**

Factors affecting audit fees in Europe: France, Germany,

and the UK

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ABSTRACT :

We examine a sample of 300 publicly listed companies in three European countries (France, Germany and the UK) during the period 2003-2008 to investigate the relations between audit fees and several auditor and company attributes. These include quantitative and qualitative variables. The presence of Big Four and non Big Four firms in charge of the audit of a company’s financial statements is also considered.

The overall evidence indicates that the presence of the Big Four, clients’ specific characteristics in terms of industry, size and complexity of operations have inevitably a significant impact on audit fees. However, the contrasting results we observe in our cross-country analysis lead to the conclusion that the environmental factors specific to each country, such as the size of professional accounting body and audit market as well as the regulations in place in the area of auditing, may play an important role in this type of research.

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1_{Paper presented at the 34th Annual Congress of the European Accounting Association (EAA-Rome April 2011) and the American}

Accounting Association (AAA-Denver-August 2011).

*Bahram Soltani, Associate Professor of Accounting and Finance, University of Paris 1 Sorbonne, center of research of Prism

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B. Soltani, C.Rekik / Cahiers de Recherche PRISM-Sorbonne / CR 11-31

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1. Introduction

Audit pricing has been one of the core subjects for academic research since the seminal work of Simunic (1980) and has become even more important in recent years. There is now an urgent need to investigate the factors affecting the audit fees in order to provide audit and assurance services at competitive prices and higher quality. Recent years have seen a dynamic period of reform in the capital market. There have been significant developments in the regulatory and legislative environment that will continue to affect corporate management, corporate governance and the audit profession. One of main objectives of such reforms is related to the function of external auditors since by examining the corporate financial statements of publicly traded companies, the auditor becomes an integral part of capital market mechanisms. For this reason, market regulators have long been concerned with potential threats to auditor independence and issues such as audit remuneration that may jeopardize this independence. The high profile corporate failures which have occurred in various capital markets have demonstrated the need for greater transparency in the areas of auditor’s remuneration and the quality of work performed as well as trust and independence as essential professional attributes. The mandatory separation between audit and nonaudit services provided by auditing firms particularly since 2003 has been an essential element in understanding the audit pricing policy of public accounting firms.

The general objective of this paper is to investigate empirically the evolution of audit fees in the European context. More specifically the paper intends to empirically examine the factors affecting audit fees within relatively long period (2003-2008), a time marked by momentous and historic events for auditors.

The objective of the study will be stated in the second section. The theoretical considerations of audit pricing are discussed in the third section. In the fourth section, an overview of the recent laws, regulations and codes introduced by the European Commission will be presented. The auditing requirements and specific characteristics of three selected countries in this study (France, Germany and the UK) are discussed in section five. The literature review will be presented in section six. The research design, study sample and

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2 methodology are presented in section seven. The analysis of results, limits of the study and concluding remarks will be provided in sections eight and nine. The concluding remarks are presented in the last section.

2. OBJECTIVES OF THE STUDY AND RESEARCH RATIONALE

In the aftermath of financial and corporate scandals at the beginning of this century and the global crisis of 2007-2008, governments in developed capital market economies, market regulatory bodies and the European Commission have identified external auditing as one of the areas in which remedial action would be necessary to avoid a similar crisis. It is important for the market and regulatory bodies in Europe to recognize that the financial scandals were not essentially the results of failures in the financial reporting and audit process of some large companies, and that responsibility was far more widely shared. The financial failures in Europe (and also the United States) raised questions about external auditors and audit committees and their performance in capital markets.

In the framework of recent laws and regulations in auditing and corporate governance, much of the attention has been focused on the organization of audit oversight bodies, audit committee and the separation of audit and nonaudit services in order to preserve fundamentals such as auditor independence, audit quality and performance of external auditors. The question whether these actions were sufficient in response to public demand is a still a matter of concern for market regulatory bodies. What can be said is that there is always a need to reinforce ethical conduct and corporate behavior, accountability mechanisms, competitive audit pricing, independence, performance and quality of mission.

The objective of the paper is to discuss audit pricing as one of the challenges for professional accountants beyond the crisis. The paper is international and focused on influential marketplaces such as France, Germany and the United Kingdom. The study is based on cross-country and cross-company comparative analyses. The paper aims for better insights into audit remuneration and companies’ practices in major European markets, and to

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3 explore the link between audit and nonaudit fees and the number of factors affecting the audit pricing.

This study uses a large number of publicly listed companies (100 for each country and for each year including the examination of 1370 annual and consolidated reports). The reasons for choice of these three countries and the period of study of six years are explained in more depth in the section of research design. We believe that these choices reinforce the quality of our research and will contribute to a better understanding of audit pricing.

The study will analyze the recent codes and regulations introduced by the European commission. This will contribute to a better comprehension of European codes and practices regarding auditor remuneration which in turn affects auditor independence and audit quality. The study will also examine the corporate practices of a large sample of European publicly held companies. This will allow a comparison among the auditing firms and publicly listed companies within a country as well as among the three selected countries.

Because of its cross-country analysis and international features, and the wide range of analyses conducted in this research, the paper is a contribution to academic literature in audit pricing and related issues. With its large sample of around 300 companies for each year (1370 annual reports for all sample), the period of study of six years and wide range of variables used in this study, to our knowledge this is the first study conducted in the European context on comparative analysis. The time period of 2003-2008 is particularly interesting for different reasons. Firstly, 2003 follows a number of momentous and historic events for auditors in terms of introduction of regulations and corporate governance codes at international, European and country levels. Secondly, it includes 2005, the year of the implementation of the International Financial Reporting Standards (IFRS) by the European Commission.

The study has practical implications as it may also allow regulators to further explore the relationships between auditor remuneration and the auditor attributes and a company’s specific characteristics in terms of size, financial performance, risk, audit committee, and also help the regulatory bodies to evaluate the coherence of regulations when revising them. The comparison between France, Germany and the UK will offer insights into policy makers and market regulatory bodies interested in enhancing the audit market environment within Europe.

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3. Theoretical considerations on audit pricing and auditors’ fees

The auditor is considered as an economic agent by Antle (1982), who addressed the issue of the auditor’s incentives by modeling his/her role explicitly as an expected utility maximizer. (p. 503). Before analyzing the specific factors affecting the auditor’s remuneration, it is essential to discuss some theoretical concepts such as the economics of audit pricing and the impact of the auditor's’ remuneration on their independence.

3.1. Economics of audit pricing

In recent years, in addition to litigation concerns which have had a serious impact on the audit market, public accounting firms have faced several significant challenges arising from market pressures due to increased competition, higher public expectation of the auditor’s function, demand for reduced audit fees, and the need to offer a dynamic mix of services in response to clients' demands. These pressures have been associated with the increasing demand of regulators and market participants for improvement of the quality and efficiency of the audit process and maintenance of their independence. The importance of these issues is such that the survival of the accounting profession largely depends on the sufficiency of responses provided by professional bodies and auditors.

Audit pricing is an important issue and has a significant effect on auditors’ performance, their independence and more particularly on audit failures. With regard to the basic economics of audit pricing, several factors must be taken into consideration. First, the audit market is competitive and auditors are under economic pressure from many sources. These include enhanced competitive bidding regimes, an excess capacity resulting from client concentration and downsizing, technological change in information technology and the development of sources of assurance, volatile economic circumstances, and changes in the purchasing behavior of clients for nonaudit services. Second, an auditor faces cost uncertainty,

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5 so the return (net income) from an engagement depends upon the fees paid by the client. In a competitive market, audits should be priced so that auditors can expect to earn a normal return. Audit fees should take into account expected losses arising from litigation and/or reputation losses into the fee.

At the same time, the fear of losing the clients and revenues generated from the various assurance activities may compromise the auditor’s independence. This is called the switch threat case. The undesirable effects, such as ‘low-balling’ and ‘opinion shopping’, are also well known. The phenomenon of ‘low-balling’ is a particular aspect of price competition and according to DeAngelo (1981) it concerns a contemplated change of auditors and that may easily cause a loss of audit quality. In many instances, this is known to lead to price erosion, which may easily entail quality erosion. ‘Low-balling’ is when audit firms quote audit fees that are below their start-up costs with new clients believing that future fees will exceed future marginal audit costs. The auditor is said to practice low-balling when the audit fees for initial audit engagements are set below total current cost (DeAngelo 1981). Critics of the audit industry say this creates an incentive for audit firms to remain with their clients for multiple periods which in turn could lead, to auditors compromising their independence to be retained for future engagements1

The ‘low-balling process’ may have a positive economic value to society but on the other hand it may result in lower than expected audit quality after the first engagement period. Concerns about the practice of low-balling have been expressed by regulatory bodies and legislators in major capital markets. They believe that competition (contrasted with ‘low-balling’) among auditors is good in that it promotes vigorous research and an understanding of the true needs of audit clients for value, proper risk assessment and ever-increasing audit quality. The question is whether the solution remains with legislators forbidding ‘low-balling’, which may have limited value in the audit market.

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‘Opinion shopping’2 may also jeopardize auditor’s independence because a company can avoid an unfavorable report even when there are no additional revenues for the auditor. For example, a company can switch if it believes that a new auditor is more likely than the incumbent auditor to give a clean report. ‘Opinion shopping’, which can take different forms, usually ends with an entity applying the easiest accounting solution deemed acceptable by an

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6 auditor or audit firm. Whether that solution conforms to GAAP or international accounting standards may be open to debate, but it does not enhance the quality of financial statements.

3.2. The effect of audit pricing on the auditor independence

The importance of the economics of auditor independence, both actual and perceived, has been widely recognized in theory by regulators. Models of auditor independence have assumed that it is a question of whether the auditor chooses to carry out a thorough audit and whether he/she colludes with a firm's managers (DeAngelo, 1981 a and b; Simunic 1984). More specifically, Antle (1984) argues that modeling the auditor as an expected utility maximizer offers the potential for obtaining insights into the nature and implications of auditor independence. However, the analysis of the economics of auditor independence cannot be thoroughly done without considering his/her remuneration. Although there are market-based incentives for auditors to remain independent, there are also factors, such as the effects of the amount of audit fees and nonaudit services performed by audit firms that could threaten auditor independence.

Additionally, since auditor independence concerns the relationship between the auditor and manager, the examination of the auditor-manager relationship is necessary in order to address the concept of auditor independence meaningfully. The crucial issue is the extent to which the auditor cooperates with management in pursuit of their self-interests. The extent of such cooperation has an important impact on the optimal compensation scheme for the auditor. Watts and Zimmerman (1981) have argued that auditors have incentives to maintain their independence, even in the absence of governmental regulations, so that self-monitoring might be sufficient.

Several authors [(e.g., Mautz and Sharaf (1961), Nichols and Price (1976), and Watts and Zimmerman (1979)] have discussed independence in terms of an auditor’s resistance to managerial pressure or interference. This notion of independence is defined as the independent auditor’s refusal to engage in side-payment schemes with the manager. This refusal is in fact a denial of completely self-interested behavior by the external auditor.

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7 The separation of audit and nonaudit services provided by accounting firms, which has been decided by market regulatory bodies following high profile corporate failures in recent years, is evidence of the close relationship between audit pricing and auditor independence. The regulators’ concern that the growth in the provision of nonaudit services compromises audit firm independence is based on the premise that the provision of these services increases the fees paid to the audit firm, thereby increasing the economic dependence of the audit firm on the client. Moreover, regulators, financial statement users, and researchers are concerned that auditors compromise their independence by allowing high fee clients financial statement discretion relative to low fee clients.

The question of whether it is proper for public accounting firms to do nonaudit related work for client companies, especially those listed in financial markets, for additional compensation has always been controversial. Before market regulators imposed restrictions on audit firms simultaneously supplying audit and nonaudit services at the beginning of this century, revenues from nonaudit services were a significant and growing portion of the revenues of accounting firms. For this reason, nonaudit services have been the most consistent, troublesome target for those critical of the independence of auditors.

Audit clients usually pay their external audit firms significant amounts for nonaudit services which introduce the risk that client management may be able to leverage its position with the external auditor, and this can affect the audit process. Several studies have examined the growth of consulting services in the large audit firms (e.g., Zeff 2003 and 1992, Previts 1985). In the 1970s and increasingly into the 1980s, consulting in the Big Eight firms commanded a much larger share of their gross fees. “Consulting fees as a percentage of total gross firm fees had increased from a range of 5 percent to 19 percent in 1977, to a range of 11 percent to 28 percent in 1984 (Previts 1985, p. 134)”. By 1990, fees from consulting vaulted to 44 percent of total gross fees for Arthur Andersen/Andersen Consulting and ranged from 20 to 25 percent of total gross fees for the other Big Six firms. It is easy to understand how critics might perceive that the supply of nonaudit services by auditing firms erodes independence.

Additionally, in order to assess the threats to independence of auditors, the regulatory bodies in major capital markets have also considered the ‘public disclosure of fees’ along with

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8 issues such as: ‘systems of safeguards to mitigate or eliminate threats to auditor independence’, ‘financial interests’, ‘business relationships’, ‘employment with the audit client’, ‘managerial or supervisory role in audit client’, ‘establishing employment with audit firm’, ‘family and other personal relationships’, ‘nonaudit services’, and ‘litigation’.

Apart from the views expressed by the advocates of auditors performing nonaudit services, there is little empirical evidence that the performance of these services for clients of an accounting firm affects auditor independence. The results of some recent empirical studies [Reynolds et al. (2004), DeFond et al. (2002) and Reynolds and Francis (2000)] do not support the regulators’ contention that nonaudit service fees jeopardize auditor independence. They suggest that a focus on nonaudit services and nonaudit fees is misplaced. Instead, they believe that a productive dialogue on auditor objectivity needs to consider the more general nature of the relationship between auditors and their clients.

4. Institutional setting regarding the audit fees in Europe

European interest in the activities of accounting firms and quality of auditors’ performance has gained considerable momentum since the late 1990s. This interest has paralleled heightened competition brought about by technological advances and the reduction of regulatory barriers in the European Union and internationally. European companies competing in global capital markets should respond to the competitive pressures of globalization and satisfy the expectations of shareholders and other stakeholders for compatible standards of corporate governance and audit committees.

There have been significant developments with regard to auditing and the structure of the audit market in the European Union in recent years and consequently these topics have received close scrutiny from the European Commission in charge of the internal market, national regulators, standard setters, practitioners and academics. This interest is mainly related to the increasing size of the European capital market in recent years, which in turn affects the audit market. There are some major differences across jurisdictions within the European Union particularly with regard to economic, cultural, professional and political issues. Auditor independence has been a long standing topic on the EU Commission’s agenda

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9 and the recent European recommendations constitute a major step forward in the resolution of this controversial and difficult issue.

Following the actions undertaken by the European Commission in the area of statutory auditing in 1984 (Eighth Directive, The European Parliament), the Council Directive (89/48/EEC), the Commission Green Paper (the European Commission, 1996), a commission communication in 1998 on the ‘Statutory Audit in the European Union, the Way Forward’, the European Commission presented in 2002 a proposal for a draft directive reshaping existing systems of recognition of professional qualifications [doc. COM (2002)199 of 7 March 2002)]. This proposal was approved by the European Parliament at first reading in September 2005. The new Eighth Company Law Directive on statutory audit aims at reinforcing and harmonizing the statutory audit function throughout the EU. It sets out principles for public supervision in all member states. It also introduces a requirement for external quality assurance and clarifies the duties of statutory auditors. Moreover, sound and harmonized principles of independence applicable to all statutory auditors through the EU have been defined.

With regard to auditor’s fees and their impact on auditor independence, the EU issued a directive' in 2005 entitled “Obligation for European member states to set rules for audit fees that ensure audit quality and prevent ‘low-balling’ – in other words preventing audit firms from offering the audit service for a marginal fee and compensating this with the fee income from nonaudit services.” On nonaudit services, the European Commission’s recommendation requires that an external auditor should be able to demonstrate that his/her independence has not been compromised by providing nonaudit services to an audit client for which the remuneration received is disproportionate to the work performed. To support such a view, the fees received for services should be broken down into three broad categories (further assurance, tax advisory and other nonaudit services). The Directive on Statutory Audit (2006/43/EC), which aims at reinforcing the principles of professional ethics in auditing and lays down a number of principles for independence of statutory auditors, emphasizes the importance of the separation and disclosure of information between audit and nonaudit services. This Directive says that “with a view to rendering the relationship between the statutory auditor or audit firm and the audited entity more transparent, Directives 78/660/EEC

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10 and 83/349/EEC should be amended so as to require disclosure of the audit fee and the fee paid for nonaudit services in the notes to the annual accounts and the consolidated accounts (p. 5, 2006/43/EC)”.

In response to the recent financial crisis, the Green Paper published by the European Commission stressed the importance of fee structure and its relationship with audit market concentration (EC 2010). According to this Green Paper, “a limit to the proportion of fees an audit firm can receive from a single audit client compared to the total audit revenues of the firmcould be envisaged along with appropriate disclosures (p. 12, COM (2010) 561 final))”. The Green Paper emphasizes the case for and against such limitations, especially with regard to their application to small audit firms, by adding that the market for audits of listed companies is essentially covered by the Big Four audit firms since in a vast majority of EU member states, the total market share of Big Four audit firms for listed companies exceeds 90%. Similar observations were made in Commission Staff Working Paper (2007) with regard to strong concentration in the audit market.

Despite these regulatory efforts, most of the issues relating to audit fees which have significant impact on auditor independence, audit market concentration and auditor legal liability, are still unresolved. It seems that, because of the internalization of the audit market and the existence of large Big Four networks, the response should come from political institutions and market regulatory bodies at international level. However, similar to several other issues which have been highlighted by recent financial market crises and the absence of firm political and regulatory willingness, no immediate changes have been made so far.

5. Audit environment and regulations in selected countries

Our choice of France, Germany, the Netherlands and the United Kingdom is based on the grounds that these three countries have the largest and the most important financial markets as well the largest multinational corporations in Europe, and together represents the bulk of the European capital market.

The three selected countries in this study are within the Europe Union and are subject to similar European directives and regulations. However, there are major differences between them in terms of the audit market as this is very much affected by legal, institutional, and

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11 economic background, as well as cultural and other issues. The important issue is that there are major differences between their systems of law. Common law countries such as the UK have accounting and auditing systems based on the ‘shareholder value model’, which to some extent are different to code law countries such as France and Germany, which are inspired by the ‘stakeholder model’.

The following section explains the major characteristics of the auditing environment and regulations in each of the selected countries.

5.1. France

Although the Commissariat aux Comptes (Certified Public Accountants) has existed as an institution since 1863, the statutory audit to inspect the accounts of French companies is primarily governed by the Company Law (Loi sur les Sociétés Commerciales) of July 24, 1966). A subsequent decree of 12 August 1969 created the Compagnie Nationale des Commissaires aux Comptes under the aegis of the Ministry of Justice.

The French accounting and auditing environment is divided into two separate professions, both of which are government regulated. The auditing profession is regulated by the Institute of Statutory Auditors (La Compagnie Nationale des Commissaires aux Comptes - CNCC), and the accounting profession by the Order of Chartered Accountants (l'Ordre des Experts-Comptables - OEC). The auditors are supervised by the Ministry of Justice (Garde des Sceaux) and accountants come under the supervision of the Ministry of the Economy and Finance. The role of the CNCC has been significantly enlarged over the years to cover inspection of accounts in all categories of organizations, both profit- and non-profit. In addition to his/her traditional role of attesting the companies’ accounts, the French Commissaire Aux Comptes is also called upon to intervene in financial operations such as raising capital, mergers and acquisitions and in investigations serving as an early warning for companies likely to encounter financial difficulties.

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5.1.1. Joint audit

The specific feature of auditing regulation in France is joint audit requirements according to which the consolidated financial statements of all publicly listed companies (groups) must be jointly audited by two independent auditors who share the audit work and jointly sign the audit report. The requirement of appointing two statutory auditors was first introduced in 1966 but the law passed on March 1, 1984, maintained this requirement only for companies required to publish consolidated financial statements.

Joint audits as such are only enforced in France, where listed companies are required to appoint two different audit firms. Denmark also had mandated joint audits but abandoned them in 2005. According to the European Commission, this practice should be developed further to "dynamise" the market to allow mid- tier non-systemic firms to become active players in the audit market, which until now has proven elusive (EC Directive, Green Paper, 2010, P. 15). In line with this practice, the European Commission envisage introducing the mandatory formation of an audit firm consortium with the inclusion of at least one non-systemic audit firm for the audits of large companies.

5.1.2. Mandatory six-year audit term

Another important feature of the auditing practices in France is that two statutory auditors are appointed for a six-year term at the annual shareholders' meeting and this appointment may be renewed without limitation. Except under exceptional circumstances that require a court decision, the statutory auditors cannot be dismissed during this six-year period. A substitute auditor must also be appointed who will be in charge in the event of death, incapacity or resignation of the primary auditor. However, the French Financial Security Law of 2003 establishes the principle of a mandatory audit partner rotation.

5.1.3. Special audit report

In addition to the ‘general audit report’ in which the statutory auditors express their opinions on the fairness of a company’s financial statements, auditors have to issues a ‘special report’

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13 on the company’s conformity with company law, and on criminal acts, or fraud that have a material impact on the financial statements, and going concern.

5.1.4. Disclosure of audit fees

Following the recent high profile financial crisis, and in line with the policy implemented in other developed markets, the French Financial Security Law of 2003 has emphasized the principle of the separation between audit and nonaudit fees. Before 2002, there was no obligation for companies to disclose the audit fees paid to statutory auditors in France. Two subsequent regulations (COB regulation n° 2002-06 and Article L.820-3 of Financial Security Law of August 1, 2003) required publicly listed companies to disclose audit and nonaudit fees paid to the statutory auditors and provide the shareholders with this information.

Accordingly, public companies have an obligation to disclose the amount of audit and nonaudit fees in the ‘Reference Documents’, which is very similar to the standardized format of annual reports or prospectuses filed with the French Financial Market. According to the COB regulation 2002-06, this disclosure should be made in a table stating the amount of fees paid to each statutory auditor and other professionals belonging to the same audit network. Fees are separated for the different engagements: statutory audit fees, other audit related fees, and consulting fees.

5.2. Germany

Germany has traditionally had a strong legalist and bank-oriented system. Auditing requirements in Germany are primarily contained in the German Commercial Code and non-binding auditing standards issued by the Institute of German Auditors (IDW). Both listed and unlisted companies are subject to these requirements, although the latter are subject to certain size criteria. A subsequent 2006 IDW self-assessment indicated that International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB) are adopted as German Auditing Standards (AuSs).

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14 There are two main sources that comprise the auditing framework in Germany: legislation and auditing standards (Institute of Auditors (IDW-2005). In terms of legislation, the German Commercial Code (HGB) contains general requirements for financial-statement audits for listed and unlisted companies and forms the basis for the auditing standards. The Institute of German Auditors issues auditing standards which are mainly based on International Standards on Auditing (ISAs) issued by the International Auditing Assurance Standards Board (IAASB). The IDW adopts the pronouncements of the IAASB as auditing standards, but modifies them in order to incorporate local legal requirements. As explained in the 2009 International Federation of Accountants (IFAC) report on the adoption of ISAs, German national standards are created based upon “a line-by-line analysis” of the ISAs.

On 26 March 2009, the German parliament passed the Accounting Law Modernization Act (BilMoG) which is the most extensive reform of accounting law in Germany since the German Accounting Directives Act of 1985. One of the important aspects of this law is related to new auditing requirements based on the implementation of the amendments to the Statutory Audit Directive, and are aimed at harmonizing audit requirements (BDI-Ernst & Young 2009).

The introduction of Sec. 317 (5) HGB new version is intended, by implementing a specification of the amended 8th EU Directive, to create the legal basis for the (direct) application of ISA endorsed as EU law in the performance of statutory audits.

5.2.2. Disclosure of audit fees

According to Sec. 285 No. 17 HGB new version, all companies must provide a breakdown of the total fees for the fiscal year. The disclosure has to be broken down by type of service and is mandatory for all medium-sized and large corporations that are not included in consolidated financial statements. Previously, only publicly traded companies were required to make such a disclosure in the notes to the financial statements. In future, all corporations must disclose the total fees charged by the auditor for the fiscal year in the notes to their financial statements.

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15 The German civil liability regime is very protective and there is a cap on the amount of damages to be paid by the auditor for contractual liability. The following sections present the specific aspects of the auditor liability regime in Germany.

The German experience of capping auditor liability

In some countries, regulators have tried to limit the auditor liability in order to protect auditors from the immeasurable consequences of law suits in connection with professional mistakes made when providing auditing services. The most significant case is Germany where the liability of auditors is limited to € 4 million. In other countries such as The Netherlands and Denmark, auditors can sign contracts with their clients specifying the auditor’s liability.

Capping auditor liability has long been an objective of the accounting industry around the world, and has seen some success in countries such as Germany. For several decades the German auditing profession has operated within a regulatory environment in which liability is restricted by a legislatively sanctioned universal cap3. This has been influenced by specific features of the corporate governance system in Germany, notably the active presence of financial institutions and employees in companies’ management and a two-tier form of governance. Germany has probably the most conservative body of law with regard to auditor’s liability as statutory law allows recovery only if the statutory auditor acted intentionally or with reckless disregard of the truth (Gietzmann and Quick 1998, p. 85).

The background of capping of auditors’ liability in Germany goes back to the beginning of the twentieth century. After several developments, in 1931, the audit profession was granted a legal basis by the enactment into law of the function of statutory audit for stock corporations. Part of the rules established in 1931 at the initiative of the German government was related to the introduction of an explicit limit on auditors’ maximum exposure to legal liability damages. Since then, all the changes in German law regarding the external auditor’s responsibility (notably the general revision of the

Aktiengesetz in 1965, the law of contract and the introduction of corporate governance rules in 2000

and 2003)4

An auditor’s liability to the client is defined in the German Commercial Code (Art. 323 HGB

Handelsgesetzbuch). The code allows the company who engaged the auditor to demand damages when

there is an evidence of culpability of auditors who have deliberately or negligently ignored their have taken into consideration the existence of a cap on liability as an important control on auditor behavior.

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16 duties. Auditor’s liability to third parties has been addressed both by tort law and contract law. The auditor is liable to third parties if he/she does not respect the rules protecting third parties (e.g. violation of the duty to report the financial information to interested parties, violation of the duty to keep the client’s business secrets confidential). The auditor can also be held liable to third parties if he/she ‘immorally’ violates his or her trust or misbehaves with the intent of damaging the third party. Auditor misconduct which may result the financial losses to third parties can include the issuing of an unqualified audit opinion without auditing the financial statements or without personally performing any audit tests.

The two most important features of recent changes in Germany regarding auditor’s liability were the revision of the level of the auditors’ liability cap on the basis of real purchasing power, and the extension of the basis for claims against auditors by third parties in the case of contractual audits and special investigations.

5.3. UK

Compared to France and Germany, the Great Britain has a stronger legal liability regime, greater audit concentration and greater ownership dispersion. It has a long and influential position in audit profession in Europe and at international level. This outstanding position is mainly related to historical background of major Big Four (previously Big Eight) and several well established accounting institutions such as the Institute of Chartered Accountants in England and Wales (ICAEW) and the Association of Chartered Certified Accountants (ACCA). Traditionally, in the UK the audit profession was under self-regulation, this is changing with the implementation of the European Directives and other regulations at national level. Since 2005, a new body (the Professional Oversight Board for Accountancy-POBA) has been created and responsible for the oversight of the regulation of the accountancy profession including the Big Four audit firms and others audit firms.

The accountancy professional bodies should respect compliance of accounting standards established by the Auditing Practice Board (APB). However, in a number of important issues such as ethical and technical standards, these bodies still play an active role. Moreover, the statutory recognized professional accountancy bodies which are seven5 have the authority to

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17 regulate their members in relation to matters such as qualifications, monitoring, complaints and discipline, to make sure an acceptable audit work is done.

The Companies Act 1985 requires all UK companies to be registered. All limited public companies, limited private companies and private unlimited companies in the UK should register with the Companies House which is an executive agency of the DTI. They are also required to send to DTI their accounts with an annual account’s report audited as well as other periodically reports.

Following the EC recommendation of 2002, the disclosure of audit and nonaudit fees paid by companies to statutory auditors is compulsory.

6. Review of literature

The subject of audit fees is one of the areas of research which has been extensively examined in academic journals. This importance is mainly related to growing interest in research regarding the competitiveness of audit markets, which have been dominated by a small number of auditing firms for the past decades. The discussion on audit fees directly leads to other interesting theoretical topics of the audit process such as auditor independence, audit pricing and nonaudit services.

This study is mainly related to the analysis of audit fees and their determinant factors within the European context. It is based on cross-country comparison of audit fees in three major European markets (France, Germany and the UK). There is a large number of research papers published in this area in the past three decades. However, because of the specific characteristics of this research in terms of cross-country analysis, we mainly discuss in this section the research papers which are directly relevant to the European audit market or important in terms of methodologies of research on audit fees (Simunic 1980) or present an overall outcome of previous research (e.g., review paper of Hay et al. 2006). Other studies are directly relevant to the European market, particularly the three selected countries. However, specific references will be made to several other studies when analyzing the results.

During 1980, the major focus of research was on audit firm size, and especially on the large shares of markets held by the Big Eight. The study of Simunic (1980) focused on the

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18 audit process and considered the Big Eight function as a cartel which charge higher than competitively warranted fees. The paper of Simunic is based on the premise that certain factors such as firm’s audit size would affect the auditor’s performance and the variations in the level of audit fees. The conclusion of the study of Simunic shows that the Big Eight as a group tend to charge lower fees than non-Big Eight firms because they benefit from their economies of scale.

An extensive review of the research papers regarding audit fees was conducted by Hay et al. (2006) using 147 separate studies published over 27 years (1977-2003) concerning more than 20 countries. By using meta-analysis6

Taking into consideration the expectation of the increasing effect on audit fees due of the Sarbanes-Oxley Act (SOX), Ghosh and Pawlewicz (2009) examine the expected increase in audit fees due to this Act. The results of this study indicate a large increase in audit fees following the enactment of SOX. Controlling for audit and client characteristics, the paper reports an increase of approximately 74 percent in the post-SOX period and a significant decrease of audit fees over the same period. However, total fees paid to auditors rose because the increase in audit fees more than offset the decline in audit fees. This increase is much more significant for Big Four audit firms (42 percent) compared to their smaller audit firms. More specifically with regard to the relationship between financial reporting risk and audit fees paid to Big Four auditors, Charles, Glover and Sharp (2010) investigate whether the association between these two changed during the historical events of 2000-2003. The paper shows that not only there is a positive, statistically and economically significant relationship the authors summarized the papers on the basis of 186 commonly used independent variables in audit fees models. These variables were classified into 18 categories and then grouped into three major categories of client attributes (size, complexity, inherent risk, profitability, leverage, form of ownership, internal control, governance, and industry), auditor attributes (auditor quality, auditor tenure and auditor location), and engagement attributes (report lag, busy season, audit problems, nonaudit services and reporting). The review study of Hay et al (2006) highlights the direct relationship between several client attributes as control variables such as size, complexity, and risk and audit fees. In our study, we have used several independent variables which are mentioned above.

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19 between financial reporting risk and audit fees paid to Big Four auditors, but that this relationship strengthened significantly around the period 2002 and 2003, when the SOX Act came into effect. The results of this study are consistent with risk management and audit pricing changes at the firms in response to significant events affecting the auditing profession during 2002-2003. This evidence shows that the auditors anticipate the effect of additional rules and regulations proposed or enacted and the increased business and litigation risk they faced in the wake of high profile corporate and accounting scandals when pricing their services and the associated risks.

In the European context, only few cross-country studies have been conducted in the past years regarding the determinant factors of audit fees. The study of André et al (2010) discussed audit fees and their determinants in France and UK. Based on the fiscal year 2005 annual reports, the authors have tested the effects of three categories of independent variables [audit attributes (Big Four firms), client attributes (size of audited company, the nature of the audited assets, level of debt, profitability and complexity) and engagement attributes (date for entity’s year end and nonaudit fees). The results of this study report that the presence of a Big Four firm, size of the audited company, level of current assets, leverage, number of subsidiaries, busy season for auditing firms and nonaudit fees have a positive impact on overall audit fees. The scope of our present research is much wider than that of André et al (2010) as we conduct a comparative analysis of three major European countries (France, Germany and the UK) over a period of six years rather than one. We also examine several independent variables not considered in the previous papers conducted in the European context.

Several research studies have specifically examined the determinants of audit fees in a single European country. In the UK, Clatworthy and Peel (2007) simultaneously examine the determinants of external audit fees of UK companies drawn from the quoted sector (Main Market, the Alternative Investment Market and Ofex), and the unquoted sector (public and private limited companies). After controlling for firm size, audit risk and complexity, the authors find that quoted and unquoted public limited companies have significantly higher audit fees than their private limited counterparts. However, despite contrary indications in prior US research, the authors find no evidence that insolvent firms that failed were charged

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20 higher audit fees in the year preceding failure. A positive relationship is also found between audit and consultancy fees - a result that persists using an instrumental variables approach to control for endogeneity.

Cameran (2005) has investigated the case of the Italian audit market by examining the effect of several independent variables on audit fees. The variables include audited company, complexity of the operations being audited, the company’s financial risk, the type of audit engagement, size of audit firms, period of audit tenure, time specific factors (each year from 1995 to 1999) and mandatory audit. The overall findings of the study show that the size, the complexity of auditee, and the audit risk have an impact on the audit fees in the Italian market. Although the study was based on the period of five years and a relatively large number of companies (338), it does not consider the major changes which have mainly taken place with respect to auditing and corporate governance since 2003 in Italy and the European Union.

The determinants of audit fees in the French market were subject to another study conducted by Gonthier and Schatt (2007). By analyzing a sample of 127 French (non-financial) companies for the year 2002, this study considers some of the independent variables as indicated above in the French context, where the system of joint audit is applied according to which the publicly listed companies have the obligation to appoint at least two external auditors. The main finding of this study is that the size of the audited company as well as their level of risk constitutes two significant factors in determining audit fees in France. Moreover, when two Big Four firms are in charge of a company’s audit, a common practice in France, the fees charged are significantly lower in comparison with those paid in other cases (for example the presence of only one Big Four). As the authors mentioned, this study was conducted in 2002 before the implementation of new laws and regulations regarding the audit market and corporate governance in France.

7. RESEARCH DESIGN and METHODOLOGY

This paper consists of various comparative analyses of audit remuneration in France, Germany and the UK and in 100 large corporations within these countries during the period of

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21 2003-2008. In this section we present the research design and methodology as well as the variables used in the study and criteria for selecting the three countries. Sample selection, sample size and methodology of research used for the present study are presented.

7.1. Selected countries and their major characteristics

Our choice of France, Germany, and the United Kingdom is based on the grounds that these three countries have the largest and the most important financial markets as well the largest multinational corporations in Europe, and together represent the bulk of the European capital market. They are significant in terms of economic indicators, capital market size, number of publicly listed companies and audit market and worldwide economic influence. Similarly the audit markets of the three selected countries in this study in terms of number of external auditors and audit fees are the most important in Europe.

All three countries have applied the European directives on statutory audits of annual and consolidated accounts. The International Financial Reporting Standards (IFRS) have also applied in these three countries since 1st January 2005.

On one other hand, there are major differences between their systems of law and accounting professions. Common law countries such as the UK, which has long historical background and strong professional bodies, emphasize accounting and auditing issues in conformity with the ‘shareholder value model’7

7.2. Sample size, source of information and period of study

. Practically all Big Four and large accounting firms have Anglo-Saxon and specifically British origins. On the other hand, the code law countries such as France and Germany, which are inspired by the ‘stakeholder model’, do not benefit from well established professional bodies. The audit market in these countries is mainly dominated by the Big Four.

The present study is conducted for the period starting 2003, a time marked by momentous and historic events for auditors. This study includes the largest companies in three selected

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22 countries. We selected the indices SBF 120, HDAX 1108

The SBF 120 (Société des Bourses Françaises 120 Index) is a

and FTSE 100 representing the largest companies respectively for France, Germany and the UK. Table 1 summarizes the information concerning the sample size and period of study. For different reasons in this study we were obliged to construct a database because, to our knowledge, there was no available readymade data on the large number of financial and nonfinancial variables concerning the countries selected in this study. Second, although some financial information can be found in a few databases, this does not cover our relatively long period of study of six years (2003-2008). All data regarding the audit and nonaudit fees, the companies’ financial statements, auditors and corporate governance attributes and other topics have been gathered manually by referring to websites of sample companies and annual reports. In order to insure the reliability of our data, we have verified and double checked the information.

The annual reports of 1373 companies have been examined for the period of study (2003-2008). This includes 551, 338 and 484 annual and consolidated reports of French, German and the UK companies respectively. The number of reports examined for each country on yearly basis during the period of study varies depending on the availability of information on variables and for this reason there are minor differences in terms of total number of reports examined. No database or information from other sources has been used for this part of the study.

INSERT TABLE 1 ABOUT HERE

French stock market index and includes one of the largest capitalization indexes in the Paris Stock Exchange. This index is based on the 120 most actively traded stocks listed in Paris and includes all 40 stocks in the CAC 40 index plus a selection of 80 additional stocks listed on the Premier Marché and Second Marché Marché under Euronext Paris. After excluding the financial institutions and the companies for which the data is not available for the period of 2003-2009, the final sample for the Paris Stock exchange includes 91 companies operating in different sectors of activities.

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23 For the German companies, the HDAX® includes the shares of all 110 companies from the DAX®, MDAX® and TecDAX® selection indices. Compared to the DAX®, the HDAX® represents a broader index covering all sectors and the shares of the largest companies listed in Prime Standard.

FTSE 100 (Financial times share index) is made up of 100 largest (according to market capitalization) UK firms listed on London stock exchange and forms the basis of futures and options traded on the London InternationalFinancial FuturesExchange (LIFFE).

We search for the information regarding the auditors’ fees and other financial data and corporate governance in the annual reports of the largest publicly listed companies included in the three indices indexes SBF 120, HDAX 110 and FTSE 100. For comparability, we exclude financial institutions, banks and insurance companies from the sample. For some companies we did not find the complete information. The final sample consists of 94 French companies out of SBF120, 89 German companies out of HDAX 110 and 84 companies out of FTSE 100 listed on the London Stock Exchange, operating in different sectors of activities.

We use the euro as a currency for financial data of companies included in the sample. The financial data in the reports of British companies are expressed in pound sterling and we convert this to euro using the following conversion rates in each year. The conversion rates calculated on average basis were extracted from the foreign exchange market.

Conversion of Pound 2003 sterling (GBP)/euro 1.48 2004 1.42 2005 1.43 2006 1.47 2007 1.42 2008 1.20

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24 This research study includes the examination of audit and nonaudit fees for a period of six years from 2003 to 2008 (except for German companies, where the period of study is 2005 to 2008 because before 2005 the disclosure of auditors’ fees was not mandatory). Compared to other studies, which have selected one year [year 2005 in the study of André et al (2010) and year 2002 in the study of Gonthier-Besacier and Schatt (2007), this study covers two particular events regarding the examination of determinants of audit and nonaudit fees. First, we start our examination from 2003, the starting period for the disclosure of auditor’s fees and the separation of audit and nonaudit services in major European markets. The study also includes 2005 in order to observe any changes due to the introduction of the IFRS as the mandatory accounting standards for publicly listed in the European major stock exchanges. The period of six years is sufficiently long to make observations about the variations of auditors’ fees and their determinants.

7.3. Explanations of the importance of the variables used in the study

The following brief explanations are provided in order to clarify the importance of the variables considered in this study.

7.3.1. Auditor attributes

The ‘auditor effect’ is an important variable used in most previous studies and is mainly shown as Big Four versus non-Big Four). The most widely used hypothesis is that large audit firms can demand higher fees (so called Big Four premium price) because of their reputation and industry specialization. Hay et al (2006) refer to this as ‘auditor quality’ and presents three proxy variables to represent it, Big8/6/5/4, a dummy variable for Price Waterhouse and a measure of industry specialization. The review study of Hay et al (2006) also discussed the ‘auditor tenure’ and ‘auditor location’ as the auditor attributes.

The present study is interested in the impact of the size of the audit firms on audit prices. Previous studies have reported both a positive relation (e.g., André et al (2010) and Cameran (2005) and a negative one (e.g., the study of Palmrose, 1986 on the importance of the economies of scale in the cost of large audit firms). Basioudis & Fifi, 2004 considered the positive impact of auditor brand name on the audit fee. As highlighted by Hay et al (2006),

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25 the most dominant determinant of audit fees found across virtually all published studies before 2003 is size of audit firms.

7.3.2. Client attributes

Different explanatory variables have been chosen in previous studies to define the client attributes. The study of Hay et al (2006) refers to the size of auditee, complexity of operations (e.g., the number of subsidiaries, number of foreign assets), inherent risk (inventory divided by total assets, accounts receivables divided by total assets) , level of profitability (e.g., net income divided by total assets or the existence of loss), leverage (e.g., ratio of debt to total assets, the quick ratio), form of ownership (public versus private companies), internal control, governance, and industry. In this study, as shown in the country descriptive statistics, we collect the information regarding the total assets, sales, stockholders equity, ratio of inventory on total assets, ratio of client accounts on total assets and ratio of long term liabilities on stockholders equity, return on total assets, return on equity, and number of subsidiaries. We also consider the case of company’s listing in the US to observe any impact on audit fees arising from extra work for auditors to satisfy the requirements of US regulators.

Hay et al (2006) concluded that the total assets is the dominant determinant of audit fees found across all published studies and it is expected to find a positive relationship with audit fees (Simunic 1980).

7.3.3. Engagement attributes

Two explanatory variables of ‘nonaudit fees’ and ‘busy season’ were selected to define the engagement attributes in this study. Most studies (Simunic 1984; Simon 1985; and Turpen 1990, etc) were related to the period before 2003 when it was possible to offer audit and nonaudit services for the same client. The existence of nonaudit fees services may have positive or negative impact on audit fees. Positive impact may have been related to the problematic situation of clients which leads to demand for such services or monopolistic position of audit firms in both areas. “The provision of nonaudit services can lead to lower fees because of cross subsidization of fees or synergies between audit and nonaudit fees (Hay et al. 2006, p. 178)”.

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26 We considered the ‘busy season’ as another engagement attribute in this study. Auditors are known to have a ‘busy season’ that corresponds mainly with 31 December. It is hypothesized that an audit conducted during the busy season may be more costly and consequently, there will be a positive relationship with audit fees.

The review study of Hay et al (2006) also refers to audit report lag (the elapsed time from balance sheet date to the issuance of the audit report), and audit problems in completing the audit (e.g. the issuance of audit reports that was other than unqualified).

7.3.4. Governance attributes

In major developed capital markets, mandatory corporate governance was introduced by market regulators in 2003. As highlighted by Hay et al (2006) the research examining the relationship between corporate governance and audit fees is limited. We selected two important explanatory variable (the number of independent members of audit committee) to examine the possible impact of effective control mechanisms on audit fees.

Taking into account that there are major differences between corporate governance systems in selected countries, we were not able to control for the effect of other variables of corporate governance on audit fees. For this reason, we consider the corporate governance attributes separately since this study is based on cross-country analysis using the data in three countries with different regulations and codes of conduct in corporate governance. There have been a number of studies conducted in the US on the relationship between corporate governance structure and audit fees, but this has rarely been subject of research in the European context particularly in recent years, which have seen significant changes.

7.4. Methodology and variables

A common methodology has developed for examining the determinants of audit fees that, according to Hay et al. (2006), has been used in well over 100 published journal articles. The basic research approach used in this study is based on an estimation model by regressing fees against a variety of measures surrogating for attributes that are hypothesized to have a

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27 positive or negative impact on audit fees. However, we have added several other variables not previously included in the previous studies such as the implementation of IFRS in 2005 and audit committee.

The model used in this study and the variables taken into consideration are presented below. The variables are classified within four attributes which are most commonly used in research studies on audit pricing. We expand the basic model to several categories of explanatory variables in order to shed light on determinants of auditors’ fees considering the regulatory measures taken in 2003 and the implementation of IFRS by publicly listed companies from January 2005. We classify the explanatory variables into four categories [auditor attributes, client attributes, engagement attributes, and governance attributes (see below for a brief explanation of the importance of each one)]. We run the following regression model for three countries for the period 2003 to 2008 (2005-2008 Germany).

Audit fees = f (factors relating to auditor’s attributes, company’s attributes, engagement attribute,

audit committee)

LHA = α0 + α1 LHNA + α2 BIG + α3 LTA + α4 STA + α5 CTA + α6 LOSS+ α7 DEBT + α8 USA + α9 ROA + α10 ROE + α11√ SUBSID + α12 Date +α13 COMIND + α14 CHANGAUT + α15 YEAR03-08 + c

In FEE = α0 + auditor attributes [country (FR, GER, UK), + nonaudit fees (α1HNA) + Big4 (α2 AUD) + client attributes [size (α3 LTAIn TA)+ stock on total assets (α4 STA) +accounts receivables on total assets (α5 CTA) + Loss (α6 LOSS) +level of debt (α7 DEBT) + US listing (α8 List) + return on total assets (α9 ROA) + Return on stockholders’ equity (α10 ROE) + α11 √SUBSID]+ engagement attribute (year-end (α12 Date), governance attribute (audit committee independence α13 COMIND) + auditor changes (α14 CHANGAUT) + Period of study (α15 YEAR03-08 α9 YEAR03-08 + c

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28 • In Fee : natural log of the audit fees,

• LHNA: natural log of the nonaudit fees, • Auditor attributes:

o AUD dichotomous variable coded 1 if auditor is from Big Four and otherwise as 0 (Because of the presence of joint audit in the France, 1 is designated if both auditors or the principal auditor is from Big Four , 0 otherwise) ,

• Client attributes:

o TA : natural log of size measure represented by the company’s total assets),

o STA : ratio of stock to total assets

o CTA : ratio of accounts receivables to total assets

o LOSS : designated as 1 if the company has made loss at the end of the year and otherwise as 0,

o DEBT : the level of financial risk is defined by natural log of the company’s total long term debt over total assets,

o US List (designated as 1 if the company is also listed on New York Stock Exchange and otherwise as 0,

o ROA : return on total assets,

o ROE :return on stockholders’ equity,

o √ SUBSID: Number of subsidiaries operating within group,

o Date :designated as 1 if final year-end is 31 December and otherwise as 0,

• Corporate governance attribute:

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29 • CHANGAUD: designated as 1 if the company has changed the auditor otherwise as 0, • Period of study

• YEAR03-08 (are dummy variables used in the study to check for time-specific factors occurring across the sample period of 2003-2008 (for Germany 2005-2008). The variable was designated as 1 if the observation was drawn from the year indicated and otherwise as 0).

• C error

8. RESULTS

We have examined various aspects of the factors affecting the audit and nonaudit fees in three selected countries and the comparison between them. Because of numerous tests performed, we present the results on separate sections.

8.1. Descriptive statistics

Table 2 shows descriptive statistics for the variables used in this study. We have examined 1373 annual reports of French, German and British companies over six years taking into account that for the German companies because there was no mandatory disclosure of audit fees before 2005, the period of study was limited to four years (2005-2008). The data include 551, 338, and 484 for France, Germany and the UK respectively (Tables 2.1, 2.2. and 2.3). In terms of audit fees paid to auditors, the French data, on average show the highest amounts (€7,520 million) whereas the British companies pay on average the highest nonaudit fees (€3,835 million). The maximum audit and nonaudit fees paid by a German group (Siemens 2007, for €73,700 million) and a British group (RioTinto 2008, €74,480 million). Because of the significant impact of nonaudit fees, on overall basis, the British companies pay the highest average fees to their auditors (€8,108 million). For the French companies, because of joint audit requirements, we report the audit and nonaudit fees for three separate cases (if both auditors are from the Big Four, if only one is from the Big Four and if none are from the Big Four). The results show that as expected the highest and lowest audit and nonaudit fees are

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30 attributed respectively to two Big Four and non Big Four auditors. The tables include the descriptive data regarding the other variables, but we do not think it is necessary to make any comments on them.

INSERT TABLE 2 ABOUT HERE

INSERT TABLES 2.1, 2.2 and 2.3 ABOUT HERE

We have also looked at the descriptive statistics of the audit market in three selected countries for large audit firms. Tables 3.1, 3.2 and 3.3 present the data concerning the market share of large firms in audit and nonaudit activities in France, Germany and the UK respectively. The results show that there are major differences among these countries in terms of the influence of large accounting firms. The information shows that in the French case, about 35 percent of the market belongs to non Big Four including about 9 percent for a local firm, Mazars. Among the Big Four, Ernest & Young, Deloitte, KPMG and PWC have the highest market share in that order. The German audit market is influenced by three Big Four firms (with about 34 percent, 26 percent and 18 percent for KPMG, PWC and E & Y respectively). Two other large audit firms (Deloitte and BDO) hold less than 10 percent of the market. The UK data show the dominance of PWC (about 37 percent), Deloitte (21 percent), and KPMG (about 18 percent). Although the proportion of the audit and nonaudit fees attributed to each audit firm is not similar for each firm, the above ranking holds.

INSERT TABLES 3.1, 3.2 and 3.3 ABOUT HERE