In this article, we will explore the relationship between audit fees and regulatory environment. In countries with lax financial reporting laws, we find that experienced audit firms can charge their clients more—much more—for their services.
Consider two publicly listed companies preparing their annual financial statements. Both are required to appoint an external auditor, both are audited by reputable audit firms, and both operate within formal corporate reporting systems. Yet the institutional environments in which they report may differ substantially.
In some countries, disclosure requirements are extensive and regulatory oversight provides a strong baseline of financial transparency. In others, disclosure obligations are less demanding, leaving external stakeholders with less publicly available information with which to assess the credibility of corporate reporting. In such settings, the experience of the individual audit partner may be especially important. A partner who has audited the same company for several consecutive years develops firm-specific knowledge and a thorough understanding of the client’s business model, internal controls, accounting practices and recurring risk areas. This knowledge may improve the auditor’s ability to identify inconsistencies and provide assurance over financial information.
This raises an important question: should these experienced audit partners be able to charge more?
Our recent study, “Audit Partner Tenure and Audit Fees: The Role of Regulatory Disclosure Requirements in Western Europe”, published in the International Journal of Auditing, suggests that the answer is yes, especially in countries with weaker disclosure requirements.
Does Experience With the Client Lead to Higher Audit Fees
Audit fees are not random. They reflect the complexity of the client, the effort required, the risk faced by the auditor and the perceived value of the audit itself. One important factor is audit partner tenure, i.e. the number of consecutive years a specific audit partner has audited the same company.
But there is a competing argument. Familiarity may also generate efficiency. If the partner already knows the client well, the audit may require less time and fewer resources. In that case, fees could decrease rather than increase.
The literature has therefore been mixed.
Our paper asks a more contextual question: does the value of audit partner tenure depend on the strength of the country’s regulatory disclosure environment?
Why the Regulatory Environment Matters
The same audit partner experience may not be equally valuable everywhere.
In countries with strong disclosure requirements, the regulatory system itself already imposes a baseline level of transparency. Companies must disclose more information, and auditors operate within a more demanding reporting environment. In such contexts, the incremental value of a long-tenured audit partner may be less visible because regulation already does part of the assurance work.
In countries with weaker disclosure requirements, the situation is different. The institutional framework provides less financial transparency. Investors, creditors, audit committees, and other stakeholders may have to rely more heavily on the auditor’s expertise to reduce information risk.
In this context, an experienced audit partner becomes more valuable. Their knowledge can partly compensate for the weaker reporting environment. And because this expertise provides additional assurance, audit firms may be able to charge a higher fee premium. Put simply: when regulation provides less trust, experience becomes a substitute for trust, and that substitute has a price.
What We Found
Using a sample of 5,016 firm-year observations from publicly listed companies across 14 Western European countries between 2012 and 2019, we find that audit partner tenure is positively as sociated with audit fees. More importantly, this relationship is much stronger in countries with weaker disclosure requirements. In low-disclosure environments, one additional year of audit partner tenure is associated with an audit fee premium of approximately 17.35%. In high-disclosure environments, the equivalent premium is only around 2.02%.
This difference is economically meaningful. It suggests that the market does not value audit partner experience in isolation. Instead, the value of experience depends on the institutional setting in which the audit takes place.
Auditor Reputation Not a Key Factor
One important aspect of the study is that the results remain robust even after controlling for auditor reputation, including whether the auditor belongs to a Big Four firm. This matters because one might assume that higher audit fees are simply driven by the brand reputation of large audit firms. Our findings suggest something more specific is at stake, namely the accumulated knowledge of the person leading the audit engagement.
The Impact of the EU Non-Financial Reporting Directive
We also examine the adoption of the EU Non-Financial Reporting Directive, which expanded disclosure requirements for large public-interest entities. Although the directive did not initially require external assurance of non-financial information, it increased the volume, structure and importance of information that auditors had to consider.
This regulatory change allowed us to examine whether stronger disclosure requirements altered the role of audit partner tenure. The evidence shows that after the adoption of the directive, the positive effect of audit partner tenure on audit fees was concentrated in countries that previously had weaker disclosure requirements, which reinforces our main argument.
The Seven Year Itch
For audit firms, our findings highlight the strategic value of partner-client continuity. Our results suggest that audit firms may be able to justify higher fees when partner tenure contributes to audit quality and assurance, particularly in less transparent institutional contexts.
However, this also creates a strategic challenge. In the European Union, audit partner tenure is limited to seven years. This ‘rotation’ means that audit firms must balance the benefits of accumulated client knowledge with regulatory requirements designed to preserve independence.
Weak Regulations Drive Up Audit Fees
For policymakers, the paper points to a hidden cost of weak disclosure regimes. When regulation is lax, companies may still obtain credibility, but it will cost them. Indeed, deregulation may reduce formal reporting obligations, but it can increase the private cost of credibility. Stronger disclosure requirements may reduce the need for companies to rely as heavily on individual audit partner experience.
For companies, the findings help explain why audit fees may rise over the course of a long audit partner relationship. A higher fee does not necessarily mean inefficiency or excessive pricing. It may reflect the growing value of client-specific knowledge.
For investors and audit committees, the same level of tenure may mean different things in different countries. In a strong disclosure environment, tenure may add relatively little to the credibility already provided by regulation. In a weaker disclosure environment, tenure may play a more important assurance role. This distinction is important when assessing audit quality, audit fees, and the governance value of auditor experience.
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