The effects of two auditors and non-audit services on audit fees: evidence from a small capital market

This paper adds to the scarce evidence on the determinants of audit fees in European countries outside the UK. The paper examines audit fees paid by companies listed on the Copenhagen Stock Exchange in 2002, which is the first year in which the disclosure of both audit fees and other fees paid to the auditor at the consolidated group level has been required by the Danish Financial Statements Act. Until 1/1-2005, listed companies are required to be audited by two independent auditors. Here, we have especially focused on the effect of this requirement on the pricing of audit fees. Our results indicate that having two independent auditors reduces total audit fees (most likely due to competitive pressure), but only for larger companies. We have used the core audit fee determinants model, which is a result of international research, with generic proxy variables for client size, complexity, risk profile and auditor size. Our findings indicate similarities with respect to the determining factors, but again a distinction has to be made between large and small companies. In small Danish companies, client size and complexity in a formal technical sense are decisive, which might indicate that audits of such companies involve a relatively large proportion of accessory accounting services in the audit service. In the generic large company, other decisive factors than client size include complexity of substance and general client risk, indicating that the typical audit of such companies is to a greater extent planned as regards risk and materiality. In contrast to most previous international research, analyses of the Danish data showed no general Big Four effect. However, our results indicate that PWC is lowballing in large companies and highballing in small companies. Finally, our results confirm international findings of a positive association between other fees and audit fees.