The examination of audit service pricing in Sweden : An empirical study on credence attributes of audit pricing and the impacts on audit fees from audit reforms in Sweden

Abstract: The pricing of the audit services has always been a popular topic, and even now, as audit reforms are happening, new insights are being brought to this topic. Several studies have shown that the audit service exhibits credence attributes, but there has not been much exploration of the effect of credence characteristics on the pricing process. The statutory audit exemption in 2010 and the regulation requiring disclosure of key audit matters (KAMs) in 2016 provide us opportunities to analyze what drives audit fees from a more comprehensive perspective. Our data sample consists of (1) 982 observations of Swedish companies from 2008 to 2012 and (2) 850 observations of Swedish public interest entities (PIEs) from 2014 to 2018. Using this sample, we analyzed (1) the potential opportunistic pricing effects behind audit service pricing and (2) the effects on audit fees of the two different audit reforms, respectively. Our result shows (1) observable credence characteristics of audits, (2) significant effects on audit fees from statutory audit exemption for small and medium-sized entities (SMEs), and (3) insignificant effects on audit fees from disclosure of KAMs. These findings contribute to previous studies suggesting consideration of credence characteristics of audits by showing that opportunistic pricing does exist in negotiating audit service prices.