Audit Fee Pressure and Audit Risk: Evidence from the Financial Crisis of 2008

Recent literature on audit fee reveals that auditors are under pressure to reduce audit fees during crisis (Goelz 2010; Ettredge et al. 2014). This paper investigates a novel aspect of auditor behavior: how the downward pressure on audit fees during crisis affects the audit fee structure, and how the association between audit fee pressure and audit fee structure is different among client types. The results, using Korean data for the period from 2005 to 2010, reveal the following: First, consistent with prior studies, audit fees dropped significantly during the financial crisis period, supporting the existence of downward pressure on audit fees. Second, among the determinants of audit fees, the coefficients on client size decreased significantly while those on client risk increased during crisis. These findings suggest that auditors respond differently to small clients and risky clients when facing downward pressure on audit fees. Finally, the abovementioned findings are more pronounced when the client is under high pressure to reduce expenses (i.e., when the client has deteriorating performance or the client is under financial constraint), suggesting that these clients are more likely to induce auditors to change the audit fee structure during crisis. Collectively, the above results provide useful insights into how auditors behave when they are under pressure to reduce audit fees.