Audit fee is a premium which is the company pay to the external auditor in exchange the auditing service. In 2012, Mathieu Luypaert and Tom Van Caneghem states that the majority of acquired firms switch to the auditor of the acquiring firm after a takeover. In other words, the acquiring firm and acquired firm share the audit firm after takeovers. In 2013, Dan S. Dhaliwal, Phillip T. Lamoreaux, Lubomir P, and Litov, Jordan B. Neyland find that in a quarter of all public acquisitions, even prior to the M&A process, shared auditors are pretty commonly observed, because sharing auditors are contributed to significantly lower deal premiums, lower target event returns, higher acquirer event returns, and higher deal completion rates. “Nearly 26% of all acquisitions among clients of Big-N audit firms have a shared auditor. ” Based on the previous research papers, we can see that
In 2014, Tom D. Adams and Jayanthi Krishnan pointed out when a common auditor exists pre-merger, information asymmetry will be lower, and communication between the audit teams will be more efficient, than when the two parties have different auditors in the American Accounting Association annual meeting. They also point out that these factors should reduce audit fees. According to this meeting content, shared a common auditor pre-merger pay less in audit fees.
According to our research, the audit fee will be reduced after merger and acquisition (M&A). Especially if the target and acquirer did not choose the same audit firm before the M&A, they would have use the same audit firm which could decrease the audit fee. First, when the target and acquirer use the same audit firm, the communication between the audit teams will be more efficient. Because audit teams can easily have access to the accounting standards and reporting policies, they can share their information effectively. Different companies always choose different accounting policies.
S,BUTTERWORTHANDK.A,HOUGHTON suggested that 5 factors were closely related with the audit fee. There are client size, client complexity, client risk, client industry and auditor size. After the M&A, we need to be consider the operating synergy. The economic of scale is one of the most significant part in operating synergy, which is the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output. Two separate company become one bigger company after M&A and so the economic of scale is happened. No matter before and after the M&A, the audit fee for company is a fixed cost to acquire the audit service. When the size of company increases, the audit fee will increase as well. As a result of the heavy workload of auditors after takeovers for ensuring the adequate compliance and substantive testing, the audit fee will increase. After M&A, the audit fee compared with the two separate firms together, which will be decreased. Because of the economic of scale, the audit fee for the whole company will be reduced which compare with the two separate firms. In the M&A case, one plus one less than two. After M&A, the audit fee contrasts with the acquiring company, it will be increased. It will be the same as compared with the target firm. Due to the size of company increases, the audit fee increased.
From literature review, we can see that after the M&A, the majority of targets switch to the auditor of the acquiring firm, which is closely related the audit quality. Because a lot of studies represent that the audit quality is different between different audit firms, different audit firms has different auditor’s competence, independence, and