Audit Office Effectiveness and Efficiency

SUMMARY Prior research suggests that audit offices charge fee premiums for delivering highly effective audits. However, effective audit offices may also be efficient, reducing costs incurred and resulting in savings being passed on to clients. This study documents a positive relation between the infrequency of Big-R restatements of financial statements across an audit office’s portfolio of publicly traded clients (which proxies for effectiveness) and lower audit fees (which proxies for efficiency), ceteris paribus. This finding, which is robust to tests of alternative explanations and a variety of measures and specifications, differs from conclusions in most prior studies that investigate the association between audit fees and perceived audit quality captured by metrics such as auditor industry specialization and office size. Overall, our results help inform investors and other stakeholders by providing evidence that contrasts with the conventional notion that higher audit fees necessarily reflect higher audit quality in the post-Sarbanes-Oxley Act era. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M40; M41; M42.