The issue of auditing price has always been a contentious subject in Germany and the USA alike. Audit fees are the common factors that seek to determine the quality and degree of competition in the greater world of auditing. Hence, Germany takes the lowest audit fees compared to the USA. Notably, several factors determine how audit fees are priced in different countries. Further on, auditing is a service that professionals have taken a notch higher by ensuring that client satisfaction is their key determinant. As the world is a global village, clients can now seek audit services based on their supposed expenses. Notably, different countries have factors that influence their audit procedures and prices. Better yet, these environments vary with countries. For instance, German firms charge low audit fees compared to the US. Thereby, there is the implication of low audit fees for German companies relative to those in the US.
One of the major goals of such changes is to improve the function of independent auditors because by analyzing the business accounting records of publicly listed businesses, the auditor becomes an important element of capital market systems. As a result, market regulators have long been worried about possible risks to auditor independence and concerns such as audit pay that may compromise this independence (Tiberius & Hirth, 2019). The high corporate mistakes in various financial markets have highlighted the necessity for more openness in areas such as auditor salary and job quality, as well as trust and independence as vital professional characteristics. The financial crisis that rocked Europe between 2007-2008 developed new ways for the European Union to come up with ways that can help solve the financial auditing crisis, more so in the USA. Deliberately, the financial failures experienced in Europe raise some serious questions on how auditors and their committees influence the capital markets.
Much of the focus in recent auditing and corporate governance laws and regulations has been on the organization of audit oversight bodies, audit committees, and the separation of audit and non-audit services to preserve fundamentals such as auditor independence, audit quality, and external auditor performance. Whether these efforts were enough in response to public demand remains a source of worry for market regulators. What can be mentioned is that there is always a need to support ethical behavior and corporate behavior, accountability systems, competitive audit pricing, independence, performance, and mission quality. Theoretical concerns about audit price and auditors’ fees Smith, Higgs, & Pinsker, (2019). considers the auditor to be an economic agent, addressing the question of the auditor’s motivations by explicitly modeling their function as an anticipated utility maximizer. Before delving into the specific elements influencing auditor salary, it is necessary to explore basic theoretical ideas such as audit price economics and the influence of auditor remuneration on independence.
Audit pricing economics in recent years, 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, in addition to litigation concerns that have had a serious impact on the audit market. These challenges have been linked to growing demand from regulators and market players for improved audit quality and efficiency and the preservation of their independence (Köhler & Ratzinger-Sakel, 2012). The significance of these concerns is that the accounting profession’s existence is primarily dependent on the sufficiency of remedies offered by professional bodies and auditors.
Audit price is a critical problem that substantially impacts auditor performance, independence, and, more specifically, audit failures. Several elements must be considered when it comes to the fundamental economics of audit pricing. First, the audit market is competitive, and auditors face economic pressure from various sources. These include increased competitive bidding regimes, excess capacity due to client concentration and downsizing, technological change in information technology and the development of sources of assurance, volatile economic conditions, and changes in client purchasing behavior for non-audit services (Jha, Kulchania, & Smith, 2021). Second, because an auditor confronts cost uncertainty, the client’s fees determine the return (net income) from an engagement. Audits should always be priced such that auditors may make a reasonable return in a competitive market. Audit fees might factor in anticipated losses from lawsuits and reputational harm.
The ‘low-balling procedure’ practiced in German may have a beneficial economic benefit to society, but it may result in poorer than intended audit quality after the first engagement phase. Regulatory organizations and politicians in major stock markets have raised concerns about the practice of low-balling. They feel that competition among auditors is beneficial because it encourages the thorough study and knowledge of the genuine demands of audit customers for value, correct risk assessment, and ever-increasing audit quality. The concern is if lawmakers prohibiting ‘low-balling’ remain the answer, which may have little value in the audit market.
In summation, low auditing fees in Germany has created an opportunity for many auditors to explore other European markets. Similarly, the US has high priced auditing fees as many oppose the low fees due to strict laws. Hence, auditors are more compelled to act within the stipulated laws of the country compared to those in the European Union. For instance, German auditors showcase a high level of competition since there is a level playfield for all to compete. But those in the USA are compelled to act within the law, thereby promoting uneven work ethics.
References
Jha, A., Kulchania, M., & Smith, J. (2021). US political corruption and audit fees. The Accounting Review, 96(1), 299-324.
Köhler, A. G., & Ratzinger-Sakel, N. V. (2012). Audit and Non-Audit Fees in Germany—The Impact of Audit Market Characteristics. Schmalenbach Business Review, 64(4), 281-307.
Smith, T. J., Higgs, J. L., & Pinsker, R. E. (2019). Do auditors price breach risk in their audit fees? Journal of Information Systems, 33(2), 177-204.
Tiberius, V., & Hirth, S. (2019). Impacts of digitization on auditing: A Delphi study for Germany. Journal of International Accounting, Auditing and Taxation, 37, 100288.
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