Pricing the Gap: Big 4 Audit Offices and Distant Private Clients

SUMMARY

We study the fees paid by distant private clients of Big 4 audit offices in the U.K. Focusing on clients located over 100 km from the auditing office when a closer office of the same audit firm is also available, we find a negative association between distant clients and audit fees. Larger discounts are related to offices with fewer clients, located in different U.K. nations, as well as to higher-performing offices, in line with results consistent with supply-side factors, where pricing decisions reflect efforts to optimize office capacity and expand client bases. Moreover, fee discounts for distant clients are concentrated among mid-sized client firms. Distant clients also exhibit higher within-GAAP discretionary accruals, but we find no relation with egregious misreporting. Our findings offer new insights into audit market dynamics in the underexplored segment of unlisted clients and highlight the role of capacity utilization and fixed-cost management in shaping audit pricing.

Data Availability: All data used for this paper are available from the authors upon request.

JEL Classifications: M42; L84; C33; C36.