Managerial Auditing Journal

Leaving a joint audit system: conditional fee reductions

Claus Holm Frank Thinggaard

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Claus Holm Frank Thinggaard , (2014),"Leaving a joint audit system: conditional fee reductions",
Managerial Auditing Journal, Vol. 29 Iss 2 pp. 131 - 152
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Leaving a joint audit system:

conditional fee reductions

Joint audit
system

Claus Holm and Frank Thinggaard

Department of Economics and Business, Aarhus University,
Aarhus, Denmark

131

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Abstract
Purpose The authors aim to exploit a natural experiment in which voluntary replace mandatory
joint audits for Danish listed companies and analyse audit fee implications of using one or two audit
firms.
Design/methodology/approach Regression analysis is used. The authors apply both a core audit
fee determinants model and an audit fee change model and include interaction terms.
Findings The authors find short-term fee reductions in companies switching to single audits, but
only where the former joint audit contained a dominant auditor. The authors argue that in this
situation bargaining power is more with the auditors than in an equally shared joint audit, and that the
auditors incentives to offer an initial fee discount are bigger.
Research limitations/implications The number of observations is constrained by the small
Danish capital market. Future research could take a more qualitative research approach, to examine
whether the use of a single audit firm rather than two has an effect on audit quality. The area calls for
further theory development covering audit fee and audit quality in joint audit settings.
Practical implications Companies should consider their relationship with their auditors before
deciding to switch to single auditors. Fee discounts do not seem to reflect long-lasting efficiency gains
on the part of the audit firm.
Originality/value Denmark is the first country to leave a mandatory joint audit system, so this is
the first time that it is possible to study fee effects related to this.
Keywords Competition, Bargaining power, Audit fee, Fee change, Fee determinants, Joint audit,
Fee discount
Paper type Research paper

1. Introduction
The European Commission Green Paper (EC, 2010) raised the question whether joint
audits should be considered as a means to dynamise the audit market of large
corporations in Europe. The subsequent proposal for regulation of statutory audits of
public-interest entities (EC, 2011) suggests the use of joint audit as a complementary
mechanism to mandatory audit firm rotation, i.e. suggesting that the maximum duration
of the engagement could be extended from six to nine years (12 years in special cases) if
a joint audit is applied (EC, 2011, Section 3.3.3). Proposals of joint audits where two audit
firms are assigned to perform statutory audits of individual companies have often been
met with fierce opposition. The typical arguments are that a joint audit inherently
increases costs for audit clients and its shareholders and increases bureaucracy
(Neveling, 2006). A recent unpublished paper by Andre et al. (2013) suggests higher
audit fees in the mandatory joint audit system in France as compared to other countries
(UK and Italy), when controlling for a number of engagement attributes including
JEL classification M42, L84

Managerial Auditing Journal

Vol. 29 No. 2, 2014
pp. 131-152
q Emerald Group Publishing Limited
0268-6902
DOI 10.1108/MAJ-05-2013-0862

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132

audit quality. A study by Zerni et al. (2012) finds that the choice of a voluntary joint audit
in Sweden is associated with substantial increases in the fees paid by the client firms.
However, together with other results specifically that the employment of a joint audit
is associated with a higher degree of earnings conservatism and smaller
income-increasing abnormal accruals the authors interpret this finding as
suggesting that higher audit quality is being priced in the market, and not that
inefficiencies make a joint audit more expensive. In our study, we exploit a natural
experiment in Denmark in which a mandatory joint audit system for listed companies
was abolished and analyse whether audit fee discounts can be obtained from using a
single audit firm rather than two.
In Denmark, the joint audit requirement was introduced in the Danish Companies Act
in 1930, and applied to all listed companies. The provision remained in force for 75 years
until being abolished on January 1, 2005. In 1930, auditing in Denmark was primarily a
one-man business (Thinggaard and Kiertzner, 2008, p. 144). The main argument for
requiring two independent auditors, therefore, was that it added an extra dimension of
trust to the audit legislators simply feared that a single auditor would not be able to do
the job properly (Hasselager et al., 1997). In other words, the joint audit requirement was
introduced as a response to concerns about audit quality. Nowadays, however, the audit
quality of single audits is no longer questioned by the Danish authorities; the main
argument put forward by Danish legislators for abolishing the joint audit requirement
was that it represented an unnecessary financial burden on companies (Danish Financial
Statements Act, 2001, Basis for Conclusions 135). Legislators pointed out that the
availability of large and worldwide auditor collaborations with the ability to cope with
the complex auditing tasks in listed companies, together with general developments
per se, were a realistic alternative to the joint audit requirement.
We consider the unique Danish setting with a fixed point in time where companies
were allowed to switch to single audits. This enables us to analyse the audit fee effects in
the individual years following this and by using panel data and tracking the switching
year of the companies, we are able to analyse whether fee differences between joint and
single audits are long term or short term. The analysis speaks to the question of whether
single audit fee discounts are related to competition or efficiency gains. Moreover, the
unique Danish setting enables us to analyse whether the effect on audit fees of a switch
from joint to single audits depends on how the audit work was shared before the
abolition and hence the relative bargaining power between the client and the auditors.
The data used in this paper was collected for the whole population of Danish
non-financial companies listed on the Copenhagen Stock Exchange (CSE) at the time of
joint audit abolition. In line with the stated expectations, we find support for fee
reductions for companies switching to single audits, but only in the first year of audit.
We also find that the single auditor fee discount is conditional on how the audit work
was shared between the involved auditors before the abolition. Specifically, we only
find single auditor discounts in situations where the former joint audit was shared
unequally between a dominant and minority share auditor. In line with Dye (1991), we
argue that in this situation bargaining power rests more with the auditors than in an
equally shared joint audit, and hence that the auditors incentives to offer an initial
fee discount are bigger in this situation. Together our results indicate that the single
audit fee discounts are related to competition rather than reflecting permanent
efficiency gains.

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The remaining part of the paper is organised as follows. In Section 2, we provide a

literature review and our hypothesis development. In Section 3, we describe the data
and research design. We provide descriptive statistics in Section 4. In Section 5, we
present our results. In the final section we conclude, consider the limitations of the
study and provide proposals for future research.
2. Literature review and hypothesis development
We first consider the arguments for a discount on audit fees by using a single auditor after
a switch from joint audits. According to anecdotal evidence, biddings over audit fees are
common practice in normal years in Denmark, and indeed the unusual situation where
the requirement for two auditors is abolished makes bidding even more likely, because
clients are now suddenly in a very powerful situation in relation to its auditors. This creates
a situation with some similarity to that of competition over an initial audit (DeAngelo,
1981). The two audit firms might expect that audit fee discounts will be an argument for the
client to switch to a single audit firm and that their chance of being selected as the preferred
single auditor is better if they offer a discount on the total audit. The two audit firms will be
willing to give the discounts because once they are chosen as the preferred auditor they will
be protected by the transaction costs of switching and thus are able to earn quasi rents.
Another argument for finding audit fee discounts in longer periods when a company drops
one of its audit firms is related to efficiency gains. In a joint audit there is a general risk of
inefficiencies. There is, for instance, a risk that the efficiency of manuals and procedures
disappears when an audit is shared. It could also be argued that some of the non-productive
overheads of planning, supervision and review would be doubled when two auditors are
involved. The possibility of an audit fee discount is also consistent with the cost argument
provided by the Danish legislators, who claimed that the joint audit requirement
represented an unnecessary financial burden on companies (Danish Financial Statements
Act, 2001, Basis for Conclusions 135). This leads to the following hypothesis:
H1.

There will be a negative relationship between audit fees and the use of single
audits after a switch from joint audits.

However, arguments for finding fee discounts in both shorter and longer time periods
in the joint audit setting are possible. While De Angelos model is based on competitive
effects from a (short term) battle over an initial audit (DeAngelo, 1981), there are
differences between the one client-one auditor setting and a setting in which companies
are allowed to drop one of their audit firms, which may affect when and where single
auditor discounts can be found. Previous research outside the joint audit setting
suggest that under-pricing of auditing services in the initial audit engagement
continues for three years and then disappears (e.g. Gregory and Collier, 1996 in the UK;
Ettredge and Greenberg, 1990 and Simon and Francis, 1988 in the USA).
One argument for a long-term single auditor discount is that switching costs
probably are low if a client should decide to switch back to the newly dropped auditor
in the first years after the initial decision. Hence, the chosen audit firm is less protected
by transaction costs in the first years after a switch. The chosen auditor is perhaps not
able to earn quasi rents in the first years after a switch unless a switch back to the
dropped audit firm is unlikely. Therefore, it is possible that audit fees will continue to
be lower in the first years after a switch, but as time goes by and the client and the
dropped audit firm lose their familiarity with each other audit fees will gradually

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increase to normal levels where quasi rents can be earned. Single auditor discounts
should also be long lasting if efficiency gains can be obtained from using a single audit
firm rather than two. Moreover, if it is perceived that joint audits provide greater
insurance value due to deeper and more accessible pockets in a jointly liable
situation then single auditors may have to offer permanent discounts on audit fees in
order to compensate for this. This provides another explanation for long-term single
audit fee discounts.
In contrast, arguments for finding single auditor fee discounts only in the short term
after the decision to switch to a single audit can also be found. The regulation that the
Danish two-auditor requirement would be abolished with effect for 2005 was passed in
2001 and hence known by all parties here. Thinggaard and Kiertzner (2008) analyse
audit fees paid by listed companies on the Danish market in 2002, i.e. three years before
the abolition of the audit requirement. Their results indicate that competitive effects
already started to show up in audit fees in specific segments here. If competitive effects
due to auditors jockeying for position as the single preferred auditor have reduced
audit fees during the three years before the actual abolition date, then there might only
be a short-term additional single auditor discount left in the abolition year to close the
deal. This leads to the following hypothesis:
H2. There will only be a short-term negative relationship between audit fees and
the use of single audits after a switch from joint audits.
If H1 is supported, i.e. there are single audit discounts, then a rejection of H2 would
indicate that single audit discounts are long lasting.
Next we query whether the particular competitive setting before the abolition of
joint audits mitigates the expected fee discount of using single audits. Audit fee levels
may depend on the bargaining power between the auditor and the client. In a joint
audit setting, bargaining power between the auditor and the client is likely related to
how the audit work was shared between the two joint audit firms, which again affects
the level of competition. The two-auditor requirement in Denmark was silent as to how
the work should be shared and in practice the share of the audit job of each audit
firm varied considerably from very equally shared audits to audits where one of the
two audit firms are very dominant. If costs of switching to a completely new audit
firm are significant, then the company has in effect created a duopoly in the case of
equal joint audits. In the dominant audit case, the company has given the auditor some
monopoly power, because there is only one seller who has already acquired specialized
knowledge of the client. Thus, according to general price theory we would expect to
find higher fees in the monopoly power situation. The dominant joint auditor is in a
strong position she is already the companys de facto single incumbent auditor
and therefore likely already earning full quasi rents on the audit (Thinggaard and
Kiertzner, 2008). We expect this downward pressure on fees due to competitive pricing
in the period leading up to the abolition to have an effect on audit fees in the
years after the abolition of the joint audit requirement. It is likely that audit fees that
are low due to competition before the abolition will continue to be lower in the first
years after even if the choice of single or joint audits has an effect the base level is
simply lower.
Moreover, it is likely that the relative bargaining power between the audit firms and
the client, and hence the competitive situation before the abolition of the joint audit

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requirement also has an effect on the expected single auditor discount, i.e. it is likely
that a single auditor discount is conditional on the relative bargaining power between
the audit firms and the client (level of competition) before the company decided to use a
single audit firm. DeAngelos (1981) model rests on the implicit assumption that the
incumbent auditor has all, or at least most, of the bargaining power in the auditor/client
relationship (Dye, 1991). The model presumes that the incumbent auditor determines
the prices at which subsequent audits will be conducted. If instead the bargaining
power rests with the clients, then they would insist auditors charge no more than the
avoidable cost of the audit, in which case there would be no future rents. If auditors
anticipate this outcome, they would not reduce their price on initial audits (Ghosh and
Lustgarten, 2006; Craswell and Francis, 1999; Dye, 1991). When a joint audit with a
dominant audit firm is compared with a joint audit with two more equally sharing
audit firms, it is likely that bargaining power rests with the dominant audit firm in the
first case and with the client in the last case. This implies that the dominant audit firm
is in a better position to determine the prices at which subsequent audits will be priced
and hence more willing to give a large discount in order to be selected as the preferred
single audit firm than when two equally sharing audit firms are involved in the joint
audit. Moreover, a dominant audit firm in a joint audit has more to lose than two more
equally sharing audit firms if the client decides to appoint another audit firm as single
auditor, which could induce the dominant audit firm to offer a larger initial discount to
win the single auditor battle. The risk that a client should decide to switch back to the
newly dropped auditor is likely smaller in a joint audit with a dominant audit firm
compared to a more equally shared audit because the dropped auditor is typically the
minority auditor. This means that the probability that the chosen single auditor will be
able to earn quasi rents for a longer time is higher when the joint audit involved a
dominant auditor, implying that higher initial fee discounts can be offered. This leads
to the following hypothesis:
H3. The single auditor discount is significantly higher when the previous joint
audit involved a dominant auditor.
3. Data and research design
The Danish audit environment
The Danish audit environment is characterized by a relatively large number of audit
firms and auditors. A count in The Central Business Register (CVR) shows that
1,600 audit firms are registered in Denmark. In accordance with the EU directive
on statutory audits (EC, 2006) as implemented in national law, Danish auditors must
be publicly qualified to audit a company with limited liability. The total number of
qualified auditors in Denmark is approximately 4,500, which is divided into
2,100 state authorized public accountants and 2,400 registered accountants
(Revisorkommissionen, 2011, p. 97). State authorized public accountants constitute
the upper tier with higher educational requirements and in listed companies at least
one audit firm must be state authorized. The demand for the services provided by the
audit firms can be related to a long tradition of mandatory audits for all limited liability
companies. Denmark has approximately 232,000 limited liability companies; however
since 2006 around 100,000 (very small) companies have been exempt from mandatory
audits. In Denmark, an audit firm is appointed for one year but can be reappointed for
consecutive years.

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136

Data description
The dataset is derived from the database Account Data, available at the Copenhagen
Business School, which contains raw data from Danish companies financial
statements since 1983, and is supplemented with data from the Orbis database by
Bureau van Dijk, plus manually collected information from annual reports. We
collected data corresponding to the full population of non-financial Danish companies
listed on the CSE (now Nasdaq OMX Nordic) facing the joint audit abolition. See Table I
for variable definitions. We use Y0 to denote the first financial year when joint audit
was optional. For most companies this was 2005 (77 companies where the financial
year is the same as calendar year), but for the rest of the population, the first possible

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Variable
AuditFee
OtherFee
Single

Table I.
Variable definitions

Definition

Natural logarithm of total audit fees in euros paid to the signing auditors
Natural logarithm of total consultancy fees in euros paid to the signing auditors
A dummy variable with the value of one if the audit is conducted by a single
auditor, and zero if the audit is conducted as a joint audit
Big4
A dummy variable with the value one if Big Four audit firms conduct all of the
audit (either as a single auditor or as joint auditors), that is if the signing audit firm
is B4 or B4-B4, and zero otherwise
Dominance
A dummy variable with the value of one if ratio between audit fee of the largest to
the smallest auditor in the last year of mandatory joint audit system (YB1) is
above median, and zero otherwise
Size
Natural logarithm of total assets in euros
Leverage
Ratio of debt-to-assets
Loss
A dummy variable with a value of one if net income is negative, and zero
otherwise
Complexity
Ratio of sum of inventories, debtors and internally generated intangible to assets
(complexity of substance)
Subsidiaries
Square root of the number of subsidiaries recorded for the company (technical
complexity)
BusySeason
A dummy variable with the value of one if the company uses the calendar year as
the financial year, and zero otherwise
MajorShareholder A dummy variable with the value of one if major shareholders hold more than
25 percent of direct total ownership, and zero otherwise
IFRS
A dummy variable with the value of one if YB1 restatements in Y0 comparative
figures resulted in absolute change in total assets and zero otherwise
ChgAuditFee
The first difference change in audit fee between two successive years (that is YB1
to Y0, Y0 to YA1 and YA1 to YA2)
ChgJtoSingle
A dummy variable with the value of one if change from joint audit in year before
to single in current year, and zero otherwise
ChgSize
The first difference change in size between two successive years
ChgLeverage
The first difference change in leverage between two successive years
ChgOtherFee
The first difference change in other fees between two successive years
ChgComplexity
The first difference change in complexity between two successive years
ChgSubsidiaries The first difference change in subsidiaries between two successive years
LossNoLoss
A dummy variable with the value of one when a client reports a loss for the prior
year but not for the current year, and zero otherwise
NoLossLoss
A dummy variable with the value of one when a client reports a loss for the current
year but not for the prior year, and zero otherwise
ChgIFRS
A dummy variable with the value of one if IFRS adoption in Y0 resulted in YB1
restatements in Y0 comparative figures for total assets and zero otherwise

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year for change was the financial year 2005/2006 (31 companies). We follow this cohort
of 108 companies starting in Y0 providing an almost balanced panel dataset for three
consecutive years. For the purpose of the fee change model, we also include data
from the same companies in the year before the abolition here denoted YB1. Table II
shows the population and sample selection for our analyses. Due to missing company
data for the various models, the final number of firm-year observations is reduced to,
respectively, 313 for the pooled fee levels model and 289 for the pooled fee change
model. Whenever we use financial statement information from YB1, due care was
taken to base the information on the same (IFRS) accounting regulation as in the
following years. As we did not have access to any database with financial statement
information before Y0, restated to IFRS, we had to collect this information manually for
all companies from the comparative figures in the Y0 financial statements.

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Research design
In order to study the possible fee implications, we apply both a core audit fee
determinants model, which has evolved from the seminal study by Simunic (1980) and
an audit fee change model inspired by studies of initial audit engagements by Ettredge
and Greenberg (1990) and Ghosh and Lustgarten (2006). The purpose of using both
levels and change models is to increase the validity of our findings by balancing the
advantages and limitations of the respective methods. The advantage of the fee levels
models is that they have been applied across a number of fee related research questions
consistently resulting in high explanatory power and have been robust across different
company and country samples as well as different time periods (Craswell and Francis,
1999, p. 203). Limitations of the cross-sectional analyses relate to potential quality
differences between auditors and the possible impact of correlated omitted variables
(Ghosh and Lustgarten, 2006). Hence, we choose a design for the levels model controlling
and testing for quality differences proxied by brand name/size of the auditor (Big 4).
In order to examine potential differences between companies, we next apply a first
difference (change) model where the companies act as their own controls to alleviate
problems with omitted company specific variables. One advantage of using a
first-difference specification rather than a levels specification is that it directly measures
temporal fee changes rather than infers changes from cross-sectional fee differences.
However, if audit fee discounts related to the abolition of the joint audit system have
already shown up in the years before the abolition due to competition, then a
first-difference specification based on data at the time of the abolition would not give
YB1

Y0

YA1

YA2

Total

Listed companies at Nasdaq OMX Copenhagen

176
Excluded financial companies
55
Non-financial companies
121
Missing data on auditor fees
4
Delisted companies
4
3
7
Available fee data for univariate models
117
117
113
110
340
Available (missing) company data for multivariate fee levels
models
108 (9) 106 (7) 99 (11) 313 (27)
Available (missing) company data for multivariate fee
change models
96 (21) 99 (14) 94 (16) 289 (51)

Table II.
Population and
sample selection

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a complete picture of the fee changes related to the switch to single audits. We try to
counter this limitation of the change model by controlling for this effect in the levels
model specification by explicitly considering the level of competition prior to the
abolition.
Our main audit fee levels model is specified as follows:
AuditFee a b1 Single b2 Dominance b3 Big4 b4 Size b5 Leverage
b6 Loss b7 OtherFee b8 Complexity b9 Subsidiaries
b10 Busyseason b11 MajorShareholder b12 IFRS
Year Dummies e

We apply the preferred proxy for audit fees in previous studies using logarithmic
transformation of audit fees (Hay, 2012; Hay et al., 2006b). Hence, our dependent
variable AuditFee is measured as the natural logarithm of total audit fees in euros paid
to the signing auditors. The difference in our study is that the total audit fee can
originate from one (single) or two (joint) auditors. The hypothesised fee implication is
explicitly examined using the dummy variable Single which is a dummy variable with
the value of one if the audit is conducted by a single auditor and zero if the audit is
conducted as a joint audit. The single auditor variable may be endogenous if the
decision to use one or two audit firms is correlated with unobservable variables that
affect audit fees. Consistent with arguments provided by Larcker and Rusticus (2010,
p. 203), we have chosen not to apply an instrumental variable method, i.e. instrumental
variables should be theoretically justifiable as well as observable as exogenous
variables, which are correlated with the endogenous regressor but at the same time
uncorrelated with the disturbance term. As a preliminary analysis of the data, we have
also run a logit model in order to capture the decision to leave or continue with joint
audits (using the Single variable as choice variable). In addition to the variables
included in the fee model applied, we have examined additional variables frequently
used in audit quality studies (Zerni et al., 2012; Francis et al., 2009). The findings
(not reported in tables) are unable to identify other variables with significant
explanatory power than those included in the fee model. In recognition of the
endogeneity issue, we use an alternative research design, where we introduce a proxy
for prior period competition as a main effect as well as an interaction effect, thus
picking up information that likely is related to the single auditor variable. In companies
with a very dominant joint auditor, the competitive effect on audit fees may have
shown up years ago when the battle for dominance took place. We include a dummy
variable (Dominance) with the value of one if the ratio between audit fees of the largest
to the smallest auditor in the last year of the mandatory joint audit system (YB1) is
above the sample median, and zero otherwise. Testing the model using an alternative
continuous proxy for dominance provides qualitatively similar results. We use the
Dominance variable to control for an inherited or entrenched competition or bargaining
power effect reaching into the period following the abolition of mandatory joint audits
and specifically hypothesize an interaction effect between Single and Dominance (H3).
Review papers by Hay (2012), Hay et al. (2006b) and Cobbin (2002) report that the
independent variables most commonly used in audit fee research in other words the core
model are generic proxy variables for client size, complexity, risk profile, and auditor
size. We include these variables as control variables in the study. Based on Simunic (1980)
and many subsequent studies (Causholli et al., 2010; Hay et al., 2006b), we expect audit

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fees to be a positive function of all the control variables except the governance variable
MajorShareholder, where a prediction in both the positive and the negative direction could
be theoretically supported as also suggested by mixed results found in different national
settings (Hay et al., 2006b, p. 175). Previous research shows that Big Four firms are often in
a position to charge a premium price in big economies such as the USA and the UK,
whereas this does not always seem to be the case in small economies such as Norway
(Firth, 1997), Finland (Niemi, 2002) and Denmark (Thinggaard and Kiertzner, 2008).
A premium price can reflect an oligopolistic market dominated by price cartels, a premium
for higher litigation risk (Choi et al., 2008) and/or an extra compensation for a quality audit
or for being connected with a well-known market brand in the capital market. We control
for these factors by including a proxy for brand name/size of the auditor using a dummy
variable with the value of one if Big4 audit firms conduct all the audit (either as a single
auditor or as joint auditors), and zero otherwise. Larger companies are likely to have more
transactions and larger balances which require more audit work, hence to control for client
size we include the natural logarithm of total assets in Euro (Size) in the model. We control
for risk profile by including the ratio of debt-to-assets (Leverage) as a proxy for general
risk associated with a client and a dummy variable for negative income (Loss) which can
be considered a profitability threshold at which auditors may begin to perceive increased
risk (Burgstahler and Dichev, 1997). The provision of non-audit services by the same firm
responsible for the audit might lead to an association between the audit fee and the fee
charged for other services. While the evidence from international research is mixed
(Firth, 1997; Cobbin, 2002; Hay et al., 2006a) a large majority supports the hypothesis of a
positive association, hence, we control for this by including the natural logarithm to
non-audit fees (OtherFee) in the model. We also test an alternative model without the
OtherFee variable to assess the potential covariance problem between the Single and
OtherFee variables (results based on the alternative model are qualitatively similar). Audit
fees will likely increase with the complexity of the audit in itself. First we consider financial
statement items for which it is often difficult to obtain sufficient and appropriate audit
evidence about whether they are free from material misstatement. Hence, the sum of
inventories, debtors and internally generated intangible assets is scaled by assets and
included in the model as a proxy for complexity of substance (Complexity). Second we
consider the (square root of) number of subsidiaries (Subsidiaries). This is the most
frequently used variable in fee studies as an indicator of technical complexity in an audit
job (Hay et al., 2006b). The logic is that the more subsidiaries a client has, the more complex
the audit gets and the more time-consuming the audit is likely to be.
If an audit is conducted during the busy season in the beginning of the year, fees may be
higher if audit staff has to work overtime (BusySeason). In addition, we include a
governance variable (MajorShareholder) as a dummy variable with the value of one if
major shareholders hold more than 25 percent of direct ownership, and zero otherwise. We
use BvD Independence Indicators B, C, D, U from the Orbis database provided by Bureau
van Dijk to capture this. The existence of a dominant shareholder could either indicate
higher agency costs or stronger control, with potentially conflicting effects on audit fees.
Listed companies in EU have been required to apply IFRS in the preparation of their
consolidated accounts commencing from the 1 January 2005. In our analysis we control
for several audit complexity issues which may also capture audit effort in relation to
specific IFRS regulation. The Danish Financial statement Act from 2001 was actually
pre-empting many of the subsequent IFRS changes because these already were included

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in the national GAAP before 2005 (Danish Financial Statements Act, 2001). In addition, we
have compared YB1 original and YB1 restated values in the Y0 (2005) financial statement
as a proxy for IFRS effect. We include a dummy variable (IFRS) with the value of one if
YB1 restatements in Y0 comparative figures resulted in absolute change in total assets
and zero otherwise.
In equation (2), we specify an audit fee change model using first-differences over
time of the variables in equation (1):
ChgAuditFee a b1 ChgJtoSingle b2 ChgSize b3 ChgComplexity
b4 ChgLeverage b5 ChgOtherFee b6 LossNoLoss
b7 NoLossLoss b8 ChgSubsidiaries b9 ChgIFRS
Year Dummies e

Chg indicates the first difference change in values between two successive years for the
individual companies. The changes represent four years of observations providing
three periods of changes, namely changes in values from YB1 to Y0, from Y0 to YA1
and from YA1 to YA2. In equation (2) the hypothesised fee implication is explicitly
examined using ChgJtoSingle which is a dummy variable with the value of one if
change from joint audit in year before to single in current year, and zero otherwise.
Similar to the audit fee change model specified by Ghosh and Lustgarten (2006) we
replace the dummy for the loss variable with two loss changes dummies, see Table I for
variable definitions. The ChgIFRS is a dummy variable with the value of one if IFRS
adoption in Y0 resulted in YB1 restatements in Y0 comparative figures for total assets
and zero otherwise. Hence, the variable proxy for change in audit effort beginning in
Y0. The other dummy variables specified in the levels model (1) cancel out by the first
differencing due to the permanent nature for the individual company. Note specifically,
that all companies with Big4-Big4 joint audits switching to single audits continued
with a single Big4 auditor thereby representing an unchanged value in the Big4
measure applied in the levels models. In order to facilitate interpretation and allow for
unbiased estimations, we include a constant and two dummies representing time
differences for the three periods considered (Wooldridge, 2009).
4. Correlations, descriptives and univariate analyses
In Table III, we present the pooled company year descriptive statistics for variables
included in the fee levels model. The 313 company-years in the pooled dataset are
subdivided into 238 with single audits and 75 with joint audits. Single audits were
immediately preferred by 68 percent of the companies in the first year. The single audit
proportion increased to 78 percent in the second year and 82 in the third year (year by
year proportions not shown in table). The result that Danish listed companies continue
to voluntarily employ joint audits is consistent with results from Sweden. Zerni et al.
(2012) report, that the proportion of listed non-financial Swedish companies that
employ joint audits is roughly 10 percent. The average audit fee for Danish listed
non-financial companies in 2005/2006-2007/2008 was e462.63 thousand. The split into
single and joint audits gives a first indication of differences in audit fees between the
two groups, with an average fee of e598.02 thousand for companies that continue with
joint audits[1] and e419.97 thousand for companies that switch to single audits.

Whole population
SD
Min. Median
Mean

Max.

Mean

734.38
1.35
807.69 1.07
1.54 6.97
0.39 0
0.50 0
0.35 0.05
0.40 0
0.23 0.00
0.46 0
0.50 0
0.49 0
n 238

4,800.00 419.97
15.38 11.97
6,400.00 361.45
15.67 11.51
1
0.82 * *
1
0.56 * *
4.67
0.53
1
0.20
1.00
0.35 *
1
0.71
1
0.58
1
0.62

3.00

9.00

80.00
11.29
1
1
0.53
0
0.35
1
1
1

7.11 132.40
8.87 11.79

2.70

3.71

17.78

35.08

21.04

6,400.00
15.67
1.00
1.00
4.67
1
1.00
1
1
1

4,533.33
15.33

16.09

259.00

379.41
11.61
0.35 * *
0.33 * *
0.51
0.12
0.28 *
0.76
0.68
0.73

598.02
12.22

4.43

35.20

1,720.44 0.13 112.38 12,500.00 2,106.09

1.80 11.77 18.54
23.25
18.95

Single audits
SD
Min. Median

316.00

43,700.00 669.79
24.50 18.75

Max.

Max.

17.78
4,800.00
15.38
3,600.00
15.10
1
1
1
1
0.86
1
1
1

1,070.94 22.06 167.20

1.45 10.00 12.03
737.35 2.67 133.33
1.72 7.89 11.80
0.48 0
0
0.48 0
0
0.20 0
0.50
0.33 0
0
0.20 0.01
0.27
0.43 0
1
0.47 0
1
0.45 0
1
n 75

3.00

3.98

316.00

9.00

65.28

8,077.64 3.87 130.64 43,700.00

2.12 15.17 18.69
24.50

Joint audits
SD
Min. Median

Notes: Difference is significant at: *5 and * *1 percent levels (two-tailed); sample means, standard deviations, minimum, median and maximum are shown; significant
results of independent samples t-tests for equality of means and Pearson x 2 tests of equality of medians between the single and joint audit subsamples are shown; see
Table I for variable definitions

Total Assets
in e million
1,013.95 4,254.53 0.13 121.21
Size (lnAssets)
18.80
1.88 11.77 18.61
Number of
subsidiaries
24.43
44.52 0
9.00
Subsidiaries
(square root of
number of
subsidiaries)
3.88
3.07 0
3.00
Total audit fee in
e000
462.63 829.15 7.11 139.20
ln(AF)
12.03
1.37 8.87 11.84
Total other fee in
e000
365.75 790.29 1.07 85.47
ln(OF)
11.53
1.58 6.97 11.36
Big 4
0.71
0.46 0
1
Dominance
0.50
0.50 0
1
Leverage
0.53
0.32 0.05
0.52
Loss
0.18
0.39 0
0
Complexity
0.33
0.22 0
0.34
BusySeason
0.72
0.45 0
1
MajorShareholders
0.60
0.49 0
1
IFRS
0.65
0.48 0
1
n 313

Mean

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Table III.
Descriptive statistics and
comparison between
single and joint audits

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However, the difference is not statistically significant as shown in the univariate

independent sample t-test for equality of means.
These univariate results should be interpreted with caution, since the figures could be
influenced by a few very deviating companies, and there is no control for the other
factors introduced in the multivariate regression model. When comparing the two
subsamples we find no significant differences based on the Pearson x 2 test of equality of
medians of the variables considered in Table III. The average size of companies which
continue with joint audits is e2.1 billion, while companies choosing single audits have an
average size of e0.6 billion. There is a statistically significant difference between the
joint and single auditor groups as regards the proportion of companies which solely use
Big 4 audit firms to conduct the audit. In single audits the proportion is higher
(82 percent) than in joint audits (35 percent). The latter amounts to 26 joint audits with
two Big 4 firms. The remaining 49 joint audits are divided in 46 joint audits with one Big
4 and 3 joint audits without a Big 4 (this subdivision is untabled). Further examination of
the Big 4 combinations (involving KPMG, PWC, Deloitte and EY) before and after the
abolition suggests no apparent patterns of joint audit combinations. Companies with
single audits seem to have had a more unequal distribution of the audit fees between the
two audit firms in the last year of joint audits, i.e. higher dominance propensity.
There is also a statistically significant difference in the complexity of substance
proxy, where single audit companies seem to have a relatively higher proportion of
financial statement items for which it is difficult to obtain sufficient audit evidence.
Table III shows that consultancy fees to the signing auditors are substantial in
Denmark; the average of other fees for the whole population amounts to more than
80 percent of audit fees. Table III also shows the sample statistics for the risk and
complexity measures used in the regression analyses. For the whole population, the
average for the technical complexity measure (square root of number of subsidiaries) is
3.88, the average for the complexity of substance measure is 0.33, and for the risk
measure (Leverage) 0.53. Ownership seems rather concentrated in Denmark with a
major shareholder involved in 60 percent of the company observations.
In Table IV, we provide the Pearson correlation coefficients for the variables in the fee
level models. The correlation show as expected a negative correlation between the
single audit dummy and the AuditFee variable, however the correlation is not significant
at the 5 percent level. The correlations between AuditFee and the other variables in the
audit fee model are significant in the predicted direction, except for the loss variable which
is significant in the opposite direction. We have no prediction for the direction (and find no
significant correlation) between the major shareholder variable and audit fees.
Table IV shows that there is a statistically significant positive correlation between
the single audit dummy and complexity of substance at the 5 percent level and a
statistically significant negative correlation with the number of subsidiaries at the
10 percent level. All other things equal this suggests that companies prefer single audit
firms when inherent risk is large and joint audits when their business is spread over a
larger number of subsidiaries. It is noticeable that the single audit dummy is
significant positively correlated with both the Big 4 and the Dominance measures.
Companies which choose single audits predominately choose a Big 4 auditor and they
are characterized by having a background with an unbalanced joint audit composition
(i.e. a dominant audit firm) in the year before the abolition. The latter suggests that
companies which chose to have a dominant audit firm in the joint audit really preferred

1
2 0.077
0.218
0.156
0.843
0.131
2 0.201
0.833
0.114
0.764
2 0.026
0.188
0.413
0.177
0.000
0.006
0.000
0.021
0.000
0.000
0.044
0.000
0.650
0.001
0.000

Coef.

pvalue

Big 4

1.42

Coef.

Leverage
ppvalue Coef. value

Size
Coef.

pvalue

Loss

OtherFee
pCoef. value

1.16

3.64

1.19

1.30

3.41

1.29

2.71

1.21

1.09

1
1.21

MajorShare
Busy
Complexity Subsidiaries
holders
Season
IFRS
pppppCoef. value Coef. value Coef. value Coef. value Coef. value

0.335 1
0.691 0.010 0.862 1
0.050 20.283 0.000 0.120 0.034 1
0.191 0.788 0.000 0.132 0.019 20.096 0.090 1
0.000 20.085 0.136 0.297 0.000 20.068 0.230 0.008 0.892 1
0.123 0.704 0.000 0.096 0.089 20.157 0.005 0.712 0.000 20.004 0.941 1
0.476 0.003 0.955 0.019 0.737 20.224 0.000 2 0.077 0.176 0.022 0.694 20.205 0.000 1
0.337 0.160 0.004 0.022 0.693 0.074 0.191 0.138 0.014 20.160 0.005 0.093 0.102 0.041 0.465 1
0.505 0.306 0.000 0.052 0.358 20.190 0.001 0.246 0.000 0.080 0.160 0.340 0.000 0.069 0.222 0.076 0.183

Dominance
pCoef. value

0.000 1
0.000 0.083 0.143 1
0.410 0.216 0.000 0.055
0.677 0.106 0.060 2 0.023
0.111 0.032 0.574 2 0.111
0.637 0.269 0.000 0.074
0.018 0.076 0.178 0.259
0.077 0.131 0.021 0.087
0.108 20.139 0.014 0.040
0.365 0.049 0.389 0.054
0.078 20.034 0.546 2 0.038

1.39

1
0.443
0.211
20.047
0.024
0.090
20.027
0.134
20.100
20.091
20.051
20.100

Coef.

pvalue

Single

Notes: n 313; two-sided p-values; see variable descriptions in Table I

AuditFee
Single
Big 4
Dominance
Size
Leverage
Loss
OtherFee
Complexity
Subsidiaries
MajorShareholders
BusySeason
IFRS
VIF for independent
variables

AuditFee
pCoef. value

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Table IV.
Pearson correlations
for variables in fee
level models

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to give the entire audit to the dominant auditor, i.e. they switched from being de facto
single auditor companies to truly single auditor companies. The correlations also show
a significant positive relationship between Size and the Big 4 dummy variable, which
suggests that larger companies tend to choose Big 4 audit firms to carry out the whole
audit. The correlations suggest a significantly positive association between other fees
and size and between other fees and the Big 4 dummy, thus indicating that larger
companies and companies with Big 4 auditors spend relatively more money on
consultancy fees to the signing auditors.
5. Results
Levels models main effects
In this section, we examine the occurrence of fee discounts based on the main audit fee
levels model (1) and in the subsequent section based on the audit fee change model (2).
All findings are reported after adjusting standard errors for heteroscedasticity (White,
1980). Table V summarizes the results of estimating the cross-sectional regression
model based on audit fee levels. Our initial findings suggest that there is an audit fee
discount by using a single audit firm rather than two. Table V column I shows a
statistically significant coefficient of 2 0.18 for the Single dummy based on pooled data
from the year of the abolition of the joint audit requirement and the following
two years. This suggests that for companies that switch from two to one auditor,
audit fees are reduced by an average of around 16 percent[2] compared with companies
that continue with joint audits. We have made a number of additional sensitivity tests
on our sample including a further examination of non-linear effects of client size and
considered the possible implications of splitting the sample at the Size median[3].
Separate regressions run on the fee level model show significant single auditor
discounts for both the small client size (n 156) and the large client size (n 157)
subsamples (not shown in tables). Overall, our finding of higher fees for joint audits is
consistent with findings of higher audit fees in the mandatory joint audit system in
France as compared to single audits in the UK and Italy (Andre et al., 2013) as well as
higher fees for voluntary joint audits in Sweden (Zerni et al., 2012).
In order to better understand the suggested fee discounts, we examine the duration in
detail. Specifically, we analyse whether there are relative fee reductions from using single
auditors in the long or only in the short term (H2). In Table V column II we split the single
auditor variable in three dummy variables: first year single, second year single and third
year single. The first year single dummy identifies all first year single observations in the
panel data. Similarly, the second and third year single dummies collect all second and third
year single observations, respectively. The results show negative coefficients for all three
dummy variables. However, only the coefficient for the first year single dummy is
statistically significant at the 10 percent level. This indicates that the audit fee discounts
are primarily due to first year effects. This finding is also supported by additional analyses
based on individual years (not shown in tables). The relative reduction is comparable to
initial fee discounts found in other markets without the joint audit requirement
(e.g. 22.4 percent in the UK market (Gregory and Collier, 1996), and 24-25 percent in the
USA (Ettredge and Greenberg, 1990; Simon and Francis, 1988)).
The variable Dominance is particular to the circumstances of our study. The main
effect of this variable is positive and significant at the 5 percent level for the model
specifications in Table V columns I and II. This indicates that if a dominant audit firm

?
2
2
2
2

2
?
?

Predict. sign
4.03
22.28

2.46
1.07
7.45
0.87
0.74
6.98
5.19
5.05
0.97
2.79
5.29
0.20
0.12
313
0.85
163.46

2.006
2 0.179

0.158
0.084
0.306
0.065
0.063
0.278
0.821
0.083
0.064
0.193
0.364
0.015
0.009
0.000

0.841
0.905

0.014
0.284
0.000
0.385
0.459
0.000
0.000
0.000
0.335
0.006
0.000

0.000
0.023

I
Main model
Coefficient
t-stat.
p-values

0.05
0.08
313
0.85
143.00

0.000

0.963
0.940

0.073
0.152
0.172
0.015
0.327
0.000
0.386
0.468
0.000
0.000
0.000
0.336
0.006
0.000

2 1.80
2 1.44
2 1.37
2.44
0.98
7.39
0.87
0.73
6.92
5.13
5.07
0.96
2.79
5.26

20.167
20.155
20.174
0.157
0.077
0.305
0.066
0.063
0.279
0.822
0.083
0.064
0.193
0.363
0.005
0.009

0.000

3.95

2.005

II
1st, 2nd and 3rd year single
Coefficient
t-stat.
p-values

0.488
0.130
0.307
0.044
0.058
0.284
0.898
0.083
0.085
0.191
0.340
2 0.439
0.017
0.010

1.784
2 0.035

0.000
0.109
0.000
0.557
0.498
0.000
0.000
0.000
0.192
0.006
0.000
0.004
0.809
0.889

3.74
1.61
7.47
0.59
0.68
7.19
5.91
5.28
1.31
2.78
4.93
22.94
0.24
0.14
313
0.86
152.46

0.000

0.000
0.718

3.54
20.36

III
Interaction model
Coefficient
t-stat.
p-values

Notes: Ordinary least squares coefficients, t-statistics and two-tailed p-values are shown; robust standard errors are used; see variable descriptions in
Table I

Constant
Single Auditor
First year single auditor
Second year single auditor
Third year single auditor
Dominance
Big 4
Size
Leverage
Loss
Other fee
Complexity of substance
Subsidiaries
MajorShareholders
BusySeason
IFRS
Single*Dominance
YA1 Dummy
YA2 Dummy
Observations
R2
F-ratio

Dependent variable
AuditFee (ln AF)

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Table V.
Relationship between
audit fees and the switch
to single auditor audits

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was involved in the audit when joint audits were mandatory, thus implying that
competition was low and that bargaining power was with the (dominant) auditor, then
all other things equal this will result in higher audit fees after the abolition of the joint
audit requirement. H3 hypothesizes that the single auditor effect on audit fees depends
on this entrenched competition effect. We will return to this part of the argument when
we return to a closer analysis of the potential interaction effect predicted in H3.
Table V also includes the variables from the core audit fee determinants model. These
variables control for other factors (besides the effect from choosing a single auditor) that
can affect audit fees. The R 2s are very high (0.85), all VIF factors are lower than 4
(Table IV), and robustness checks show that results are not unduly affected by outliers[4].
All in all, this indicates that the model is well specified. We find that most control variables
from the core audit fee determinants model are significant at the 0.1 percent level and show
the expected signs. However, the risk proxies (Leverage and Loss) and the Big4 dummy
are not statistically significant. Thus, our findings suggest that audit fees are not based on
considerations of client risk in the financial years under study. However, this is not an
unusual finding in related prior studies either, for example, Thinggaard and Kiertzner
(2008) and Gonthier-Besacier and Schatt (2007). In Denmark, auditors litigation risk is
considered relatively low compared with other countries (Holm and Warming Rasmussen,
2008). This is in line with the observation that litigation environments in Europe generally
seem to be less aggressive than in the USA (Baker and Quick, 1996). Thus, the low
litigation risk may explain the insignificant coefficient for the risk proxies. The
IFRS variable proxy for additional audit effort (higher fees) following the adoption of IFRS
reporting standards in 2005. We find support for higher audit fees following the IFRS
adoption in the pooled sample. This finding is robust for subsamples based on client size,
that is, we find parallel results for the IFRS variable for both the small client and large
client subsamples (not shown in tables).
The insignificant Big Four coefficient indicates that Big Four audit firms do not
charge premium prices when they have all the audit work (either as single auditor or
when two Big Four audit firms conduct a joint audit). This result is in line with
previous findings in audit fee studies in smaller economies (Thinggaard and Kiertzner,
2008; Niemi, 2002; Firth, 1997; Langendijk, 1997) and may reflect the fact that there is
fierce competition in the audit market[5] and that Big Four auditors extra litigation
risk is low, or that Big Four audit firms do not perform higher quality audits for which
clients are willing to pay extra[6].
Change model results
We now consider H1 using a first-difference specification thus allowing the companies
to act as their own controls. The ChgJtoSingle variable in Table VI identifies
companies that switched from a joint audit the year before to a single audit in the
current year. Results in Table VI column I show the effect from the very first year
when joint audits became voluntary. This is the year where most companies switched
to single audits. The coefficient is significant at the 10 percent level and negative,
which indicates that companies experienced lower audit fees if they changed to a single
audit firm rather than continued with two. Because a first-order difference of a
logarithmic transformed measure (such as the AuditFee) is actually the percentage
change this allows for easy interpretation. This result supports the finding of a single
auditor discount as a first year effect.

?
2

?
?

Predict.
sign
0.099
20.123
0.082
0.069
20.092
4.899
20.001
20.207
0.008
20.071

0.236
0.024
0.170
0.149
0.265
0.004
0.918
0.399
0.634
0.451

0.006

1.19
2 2.3
1.38
1.46
2 1.12
3
2 0.1
2 0.85
0.48
2 0.76
96
0.74
2.82

p-values
0.017
2 0.053
0.178
0.045
2 0.303
0.436
0.019
0.601
0.016
0.002
0.088
2 0.055

0.16
20.52
1.27
0.83
21.44
1.49
0.95
1.01
0.47
0.02
0.79
20.53
289
0.30
2.23
0.016

0.874
0.602
0.206
0.410
0.152
0.138
0.342
0.313
0.641
0.986
0.431
0.595

II
Pooled one year changes
Coefficient
t-stat.
p-values
0.028
20.031
0.044
0.062
20.105
1.844
0.010
20.247
0.002
20.017
0.048
20.063

0.3
2 0.41
1.81
1.00
2 1.43
0.98
0.53
2 0.85
0.07
2 0.16
0.34
2 0.43
147
0.30
2.83

0.006

0.767
0.683
0.073
0.318
0.156
0.327
0.597
0.397
0.946
0.871
0.737
0.667

III
Pooled one year changes,
real choice
Coefficient
t-stat.
p-values

Notes: Ordinary least squares coefficients, t-statistics and two-tailed p-values are shown; robust standard errors are used; see variable descriptions in
Table I; changes between successive years are YB1 to Y0, Y0 to YA1 and YA1 to YA2

Constant
ChgJtoSingle
ChgSize
ChgLeverage
LossNoLoss
NoLossLoss
Chg Other fee
ChgComplexity
ChgSubsidiaries
ChgIFRS
Year A1 Dummy
Year A2 Dummy
Observations
R2
F-ratio

Dep. Var.: ChgAudit fee

I
YB1 to Y0
Coefficient
t-stat.

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Table VI.
Relationship between
change in audit fees
and change to single
auditor audits

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However, the change variable is not significant when considering the pooled one year
changes in column II. One disadvantage with the pooled dataset in column II is that the
benchmark category (no change to single) is a mixed group consisting of both companies
that continued with joint audits and companies that did not change to single because they
already were single. In order to get a clearer picture of the fee effects when companies drop
one of their audit firms rather than continue with two, we removed companies if they
already changed to single audits. Hence, in column III we identify the cohort of companies
with a real choice. The reduced number of companies with the choice of changing from
joint to single audits is thus 147. However, the result for this reduced cohort is similar to the
full pooled dataset. Only the change from the year before to the year after the abolition
supports an audit fee discount for companies changing from joint to single audits.
Table VI also includes changes in other variables from the core audit fee determinants
model. These variables control for changes in other factors (besides the effect from
switching to a single auditor in the various categories) that can affect audit fees. All VIF
factors are lower than 2 (not shown in tables). The R 2s in the regression based on pooled
data from the three years (0.30) are modest but higher than reported in the related study by
Ghosh and Lustgarten (2006)[7]. While this suggests that the model is relatively well
specified, none of the changes in control variables seem to affect the specific audit fee
change in the first or subsequent years following the abolition of joint audits in Denmark.
Overall our findings are in line with the stated expectations, i.e. we find a negative
association between audit fees and the use of single audits, which indicates that fee
discounts are attainable for companies switching to single audits (H1). Our findings
suggest that this effect is a short-term effect concentrated on the very first year when
single audits became optional, which is also the year where most companies decided to
switch and hence experienced their first year with a single auditor (H2). Thus, the
results seem to indicate that the single audit discounts are related to competition rather
than reflecting long-lasting efficiency gains on the part of the audit firm.
Levels model interaction effect
We now consider whether the single auditor fee discount depends on how the joint audit
work was shared between the joint auditors before the abolition, and hence the relative
bargaining power between the auditors and the client. Table V column III shows a
negative and statistically significant coefficient on the interaction variable
Single*Dominance. This suggests that single auditor fee discounts are larger when a
dominant auditor was involved in the former joint audit. The introduction of the
interaction term means that the single auditor variable now measures the fee discount
when two equally sharing audit firms were involved in the joint audit. The coefficient is
statistically insignificant, which indicates that there are no single auditor discounts in this
case. The sum of the single auditor variable and the interaction term is the single auditor
discount when the former joint audit was unequally shared. The coefficient is negative and
highly significant. This suggests that the single audit fee discount is related only to single
audits where the relative bargaining power between the client and the audit firm rested
with the audit firm and hence where competition was low (H3). We have argued that in this
case the dominant audit firm is in a better position to determine the prices at which
subsequent audits will be priced. Moreover, the dominant audit firm has more to lose if the
client should decide to appoint another audit firm as single auditor. These arguments
could explain why a dominant audit firm will be more willing to give a large discount

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in order to be selected as the preferred single audit firm, than when two equally sharing
audit firms are involved in the joint audit. The conditional single auditor effect may also be
explained from the alternative viewpoint of the prior audit composition. While the
Dominance variable in Table V column I and II suggests a positive main effect of audit
fees, the introduction of the interaction term in the model clarifies that that companies with
a dominant auditor will experience a continued higher audit fee if a joint audit is
maintained (the Dominance variable in column III measures the effect of prior dominance
for future joint audits), while the implication of the interaction term is that lower fees are
obtained by switching to single auditors (i.e., combining the Dominance variable and the
interaction term suggest that only a minor positive effect on audit fees remains).
6. Conclusion
Our study examines the consequences and implications of Denmarks switch, in 2005,
from a mandatory joint audit regime to a single auditor/voluntary joint audit regime for
listed companies. The European Commission has raised the question whether joint
audits should be considered as a means to dynamise the audit market in Europe. We
provide empirical evidence to the discussions about the costs related to this. In this
study, we address the question of whether single audit fee discounts are related to
competition or efficiency gains. We further address whether fee discounts depend on the
relative bargaining power between the client and the auditor at the time of the decision
about one or two auditors. Our analyses of differences in audit fee levels between
companies that continued with two audit firms and companies that switched to a single
auditor in the years after the abolition are initially based on the core audit fee
determinants model. We first include a dummy variable representing the use of a single
audit firm. The association between this variable and audit fees is negative and
statistically significant, which supports H1. The results show that audit fees are reduced
by an average of around 16 percent in companies that switch from two to one auditor in
the first three years after the abolition of the joint audit requirement compared with
those continuing with joint audits. However, further analyses show that the audit fee
discounts in single audits are only statistically significant in the first year audit after a
switch, i.e. a short term rather than long-term effect (H2). The results from the core audit
fee levels model are supported by results from an audit fee change model inspired by
studies of initial audit engagements by Ettredge and Greenberg (1990) and Ghosh and
Lustgarten (2006), where fee changes are measured directly and where companies act as
their own controls. The results again support H2 as a short-term effect.
In a joint audit setting the sharing of an audit between the involved auditors,
competition and the relative bargaining power between the client and the auditors are
interrelated. Dye (1991) argues that the relative bargaining power between the client
and the auditor can have an effect on the incumbent auditors ability to raise fees above
cost for subsequent audits and hence the auditors incentives to offer discounts on
the initial audit. We analysed whether the single auditor fee discount depends on how
the joint audit work was shared between the joint auditors and hence the relative
bargaining power between the auditors and the client in the last year with mandatory
joint audits. Our results suggest that the single audit fee discount is related only to
single audits where the relative bargaining power between the client and the audit
firms rested with the audit firm which supports H3. Together our results indicate that
the discounts are mainly due to initial price cuts as a result of the special competitive

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150

situation created by the abolition of the joint audit requirement rather than reflecting
long-lasting efficiency gains on the part of the audit firm.
Our particular research design involves strengths as well as limitations. The change in
regulation provides a natural experimental setting and the benefit of a full population
examination is that the full variation of possible outcomes is covered. The limitation is that
the number of observations is constrained by the particular setting. This is a limitation in
terms of the possible inferences made on audit fee developments, but also in terms of data
availability for analysis of potential differences in audit quality. The validity of the
reported findings is of course subject to the use of an appropriate research design. We
acknowledge that unobservable variables may affect audit fees in a manner not considered
in the chosen design. These caveats are shared by a number of prior fee studies based on
archival data. Future research would benefit from new theoretical models considering the
complexity of joint audit client/auditor relationships, including such conditional factors
identified in our study. Further research on the role of bargaining power in joint audit
situations could examine the potential interactions between same type auditor firms
(Big Fours) and different type audit firms (Big Four vs non Big Four). In addition, the area
calls for more research taking a more qualitative research approach to examine whether
the use of a single audit firm rather than two has an effect on audit quality.
Notes
1. Gonthier-Besacier and Schatt (2007) report an average of e445 thousand in 2002 for
127 French joint audit companies that voluntarily disclosed their audit fees.
2. The implied fee reduction (r) can be found by: r e2 c 2 1, where c reported coefficient;
see Gregory and Collier (1996), footnote 2.
3. We have also tested for non-linear effects using Ramseys Reset test and specifically
examined the potential for using powers of the Size variable in order to assess the robustness
of the reported results. In addition we have generated dummy variables for each decile of the
raw size measure and re-run our regressions with these variables. The main findings are
robust to the inclusion of these alternative size measures. We thank an anonymous reviewer
for suggesting these additional tests.
4. We have performed sensitivity tests by winsorising the continuous variables to the
1st/99th and 5th/95th percentiles and our findings are qualitatively similar to the reported
findings on all the hypothesized relationships, as well as, the direction and significance of all
the control variables in models presented. Trimming (excluding) the data from the smallest
and largest companies have no differential effect on the findings either. Because we want to
show the full variation of the data for the whole population of non-listed companies, we have
chosen not to winsorise or trim in the findings reported.
5. Fierce competition is supported by a report by London Economics and Ewert (2006) for the
European Commission which shows that Denmark is one of the countries in the EU with the
least concentrated audit markets.
6. We carried out an additional test, which included an interaction variable between the
SingleAuditor variable and the Big4 variable, in order to analyse whether there is a marginal
effect from being audited by a single Big 4 audit firm. Results (not reported) showed that the
coefficient was insignificant, i.e. the audit fee discount when changing from a joint to a single
audit does not seem to be depend on the size of the single auditor.
7. Note that the standard deviations are based on robust standard errors, and that the R 2s are
not adjusted in this model.

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Corresponding author
Claus Holm can be contacted at: hoc@asb.dk

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