Journal of Accounting in Emerging Economies

Audit prices and Big 4 fee premiums: further evidence from Thailand
Thanyawee Pratoomsuwan
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JAEE
7,1 Audit prices and Big 4 fee
premiums: further evidence
from Thailand
2 Thanyawee Pratoomsuwan
Business Administration Department,
Mahidol University International College, Nakhonpathom, Thailand

Abstract
Purpose – Because there is mixed evidence regarding Big N fee premiums across countries, the purpose of
this paper is to re-examine the phenomenon of audit price differentiations in the market for auditing services
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in Thailand. Although Hay et al. (2006) and Hay (2013) reviewed over 80 audit fee papers from 20 countries
over 25 years, 13 of which were based in emerging economies, the understanding of the market for auditing
services in Thailand remains limited. Because the Thai auditing market is also classified as a segmented
market – i.e., a market that is less competitive for large-client firms and more competitive for small-client
firms – this study tests audit price competition in an emerging audit market using Thailand as an example.
Design/methodology/approach – The traditional audit fee model is used to estimate audit fee premiums
for a sample of over 300 non-financial companies listed on the Stock Exchange of Thailand in 2011.
Findings – Although the market for auditing services in Thailand is consistent with that described in
Ferguson et al. (2013) – in which Big N audit firms dominate only the large-client segment – the results show
that Big N auditors charge higher audit fees and earn higher fee premiums compared with non-Big N auditors
in both the small- and large-client segments of the audit market.
Research limitations/implications – The evidence from this study reveals the existence of Big N fee
premiums across market segmentations. Audit price differentials between Big N and non-Big N firms in both
small- and large-client market segments might concern regulators regarding competition in the audit market
with respect to whether the Big N firms are charging uncompetitive audit fees. These findings also imply that
audit pricing varies across countries and the Big N price deferential is typically larger in emerging markets
than in more developed audit markets and that it might be inadequate to study single-country audit pricing.
However, the question whether the Big N fee premium results from Big N product differentiation is not
directly investigated in this study.
Originality/value – Because earlier studies focusing on audit fee premiums have been conducted using data
from the USA and Australia, the findings add to the limited evidence regarding audit fee premiums in an
emerging country such as Thailand.
Keywords Thailand, Audit fee, Audit market, Big N fee premium
Paper type Research paper

Journal of Accounting in Emerging
Economies
Vol. 7 No. 1, 2017
pp. 2-15
© Emerald Publishing Limited
2042-1168
DOI 10.1108/JAEE-07-2014-0039
1. Introduction
Although Big N fee premiums have been investigated in many studies, conclusions
regarding these fee premiums are mixed (Hay et al., 2006; Hay, 2013), and most examinations
of audit prices have focused on the USA, the UK, Australia and New Zealand markets.
Recently, the decrease in the number of large audit firms from six to four (i.e. the Big 6
became the Big 4) has raised concerns among USA and UK regulators regarding the impact
of the market power of the Big 4 firms on audit pricing and audit quality; thus, questions
regarding competitive pricing in audit markets remain valid and timely (Fung et al., 2012;
Gerakos and Syverson, 2013). Following microeconomic theory, the market for auditing
services may be categorized as oligopolistic. Consistent with an expected increase in an
audit firm’s market power, audit fees have increased disproportionately with client firm size
over the years (US Government Accountability Office, 2008; European Commission, 2010),
which is consistent with expectations that the market power of an audit firm is growing.
Campa (2013) noted that interviewees replied to the “call for evidence” from the Economic
Affairs Committee of the UK House of Lords in 2010 investigating whether the existence of a
 Big N audit premium is related to the oligopolistic structure of the audit market (those audit Audit prices
firms that have historically been referred to as the Big 4, Big 5, Big 6 or Big 8 audit firms are and Big 4 fee
referred to in this paper as “Big N auditors”). Using a sample of UK listed firms, Campa premiums
(2013) argued that Big N fee premiums are not associated with audit quality but that the
concentration of the audit market leads to excessive fees charged to Big N clients. These
results support concerns voiced by regulators. In contradistinction to Campa (2013), Numan
and Willekens (2012) found that higher market concentration in the Belgian audit market is 3
associated with lower audit fees. However, Numan and Willekens (2012) did not consider the
effect of the size of the audit market on market concentration. Eshleman (2013) accounted
for audit market size and added that the association between market concentration and
audit fees varies with the size of the audit market, which is measured by the number of
clients and/or by client size, i.e., whether clients are small or large firms. Eshleman (2013)
argued that audit market concentration leads to higher audit fees when clients are small but
that audit market concentration results in lower audit fees with large clients because
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auditors achieve economies of scale and pass these scale economies on to their clients. Thus,
the uncompetitive audit pricing that concerns regulators only occurs in the small-client
market segment. Ferguson et al. (2013) used the Australian audit market as the sample in a
study of the association between audit market concentration and fee premiums and suggest
that the Big N fee premium is evidence of sunk cost recovered by Big N firms and not
market power. Consistent with Ferguson et al. (2013), Sirois and Simunic (2011) developed a
model based on Sutton (1991) that examined the production of audit quality that addresses
audit effort and audit technology. Their findings suggested that the difference between Big
N and non-Big N firms is fundamentally related to differences in investment in audit
technologies that contribute to determining both audit quality and audit fees. Sirois and
Simunic (2011) suggested that the audit market remains competitive and innovative despite
its high level of market concentration. Importantly, these findings do not confirm the
concern that an increase in supplier concentration in the audit market will result in
increased audit prices. Thus, the competitiveness of the audit market and audit pricing
remains an open theoretical question that remains a focus of regulators, in particular.
This study aims to provide further evidence regarding audit price competitiveness in
Thailand and to contribute to the corpus of the audit fee literature from less-developed markets
and/or in the international context. The Thai auditing market presents a unique setting in which
to examine audit pricing. First, it should be noted that the market has certain characteristics that
are similar to those in the USA and Australia, i.e., there is Big N dominance only in the large-
client segment; almost 70 percent of large public companies are audited by Big N auditors and
65 percent of small clients are audited by non-Big N auditors. Unlike the Hong Kong auditing
market described in Gul (1999) in which the Big N dominate both the small- and large-client
markets, the audit market in Thailand more closely resembles a developed audit market.
Because the characteristics of the Hong Kong audit market differ from those of the USA and
Australia, Gul (1999) found that there is a Big N premium in both the small- and large-client
segments, whereas most of the findings from studies conducted in the USA and Australia have
suggested that there is a Big N premium only in the small-client market segment. Because the
Thai audit market is also classified as less competitive for large-client firms (i.e. Big N
dominance) and more competitive for small-client firms, this study tests the following two
controversial propositions regarding audit pricing: whether Big N auditors receive a higher price
premium than non-Big N auditors in both the small- and large-client segments and whether Big
N auditors earn a fee premium only in the small-client segment. It should be noted that the
assumption regarding Big N product differentiation is not directly tested in this study, although
the market competitiveness assumption is predicated on the notion that product differentiation
exists when pricing is less competitive. In Thailand, this assumption is connected to the rules
and regulations that require listed Thai firms to use auditors approved by the Thai Security and
 JAEE Exchange Commission (SEC); therefore, audit services provided by approved auditors –
7,1 regardless of the particular firm – are presumed to meet certain auditing standards, which
means that the quality of audit is signaled publicly by regulators. However, in an oligopolistic
market, price discrimination seems to prevail whether the product is differentiated or not.
The results of the present study are inconsistent with Numan and Willekens (2012), who
argued that, if the audit market is concentrated and sufficient, Big N auditors that achieve
4 economies of scale should pass these benefits on to their clients by charging more competitive
or lower audit prices compared with non-Big N firms. Examining audit pricing from both the
small- and large-client segments in the Thai audit market, the findings of this study suggest
that there is evidence of the existence of a Big N fee premium in both the small- and large-client
market segments. Therefore, these findings suggest that the Thai auditing market is likely to
be characterized by oligopolistic characteristics. The advantage of studying Big N fee
premiums in Thailand is that the Big N auditors only dominate the large auditee market in the
Thai audit market, which is similar to the US and Australian audit markets. However, as
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opposed to the USA and Australia, Choi et al. (2008) classified Thailand as characterized by a
weak legal regime, and the Big N audit price differentials are likely to be significantly large
compared with non-Big N auditors. The findings in this study thus augment the argument that
the nature of competition in the auditing market is imperfect and local and that audit pricing
always has different implications across market segments and regions.
The remainder of this paper is organized as follows. Section 2 provides a review of the
literature and develops the hypothesis. Section 3 describes the research design. Sections 4
and 5 present the results and offer additional analysis, respectively. The limitations of the
study are discussed in Section 6 and Section 7 concludes.

2. Prior research and hypothesis development

2.1 The market for auditing services
The market for auditing services is considered to be competitive, and different auditors should
differentiate the services that they provide. In the auditing literature, an audit is described as a
differentiated product in which quality is related to the size of audit firms (DeAngelo, 1981).
In recent decades, it has been assumed that the market for auditing is segmented. The small-
client market segment appears to be more competitive because such clients are served by a large
number of auditors, whereas the large-client segment is assumed to be less competitive because
of the dominance of a few large audit firms (Simunic, 1980). However, under the competitive
market assumption, producers who are large and have a brand name generally charge higher
prices for the differentiating product attributes they offer; the Big N audit firms are a prime
example of this type of producer in the market for audit services. Numerous findings are
inconsistent with the notion that the market for auditing services is competitive, and several
economic explanations have been offered to explain the differences in audit pricing between Big
N and non-Big N auditors. For example, Simunic (1980) found no fee premiums between Big N
and non-Big N auditors and argued that the market for auditing services is competitive and that
there is no product differentiation or economies of scale for Big N and non-Big N auditors.
Conversely, Francis (1984) indicated that Big N auditors charge higher audit fees than non-Big N
auditors in both the small- and large-client segments; the results from Francis (1984) suggest a
competitive audit market with product differentiation across market segments. Later, Francis
and Stokes (1986) attempted to reconcile these two contradictory results using data from
Australian non-financial firms. In the largest client segment, the findings are consistent with
those of Simunic (1980) that there are no price differentials between Big N and non-Big N
auditors. However, for smaller auditees, the results from Francis and Stokes (1986) show that the
audit provided by Big N auditors differs from that provided by non-Big N auditors, which is
consistent with Francis (1984). Based on the findings of Francis and Stokes (1986), the audit
market appears to have followed the pattern of Big N product differentiation and diseconomies
 of scale for non-Big N auditors to audit large auditees. Moreover, audit prices have also been Audit prices
examined in the market for auditing services in emerging countries, such as India, Hong Kong, and Big 4 fee
Singapore, Malaysia, Indonesia, Pakistan and Bangladesh (Simon et al., 1992; Simon and Taylor, premiums
1997; Gul, 1999, 2006; Ahmed and Goyal, 2005; Siddiqui et al., 2013). In particular, Gul (1999)
argued that the findings in Francis and Stokes (1986) are not consistent with the theory of
market efficiency and long-run economic equilibrium. Their results demonstrate that fee
premiums are higher for Big N auditors than for non-Big N auditors in both the small- and large- 5
client segments.
Big N firms’ market power has been investigated continuously. Recent studies examine the
market power of Big N firms and the impact of market power on competition in the audit
industry and on audit fee premiums (Carson et al., 2012; Cullinan et al., 2012; Campa, 2013;
Numan and Willekens, 2012; Ferguson et al., 2013). The mergers of large audit firms have
caused the number of the largest audit firms to shrink, leading to the emergence of the Big 4
auditors; this outcome has raised regulatory concerns regarding the impact of this shift in the
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audit industry. As the number of large suppliers grows smaller, the market power of the
remaining firms tends to increase and, as a consequence, may be accompanied by
inappropriate increases in Big N audit fees. Carson et al. (2012) explored the relation between
Big N fee premiums and increases in the market power of the Big N auditors in the Australian
audit market over a 12-year period. To analyze the impact of market power on audit pricing
based on different levels of competition, they categorized their sample into three segments:
large global, mid-level and small local. Their findings indicate that the premiums earned by
Big N auditors actually increased at a decreasing rate in the largest client segment, whereas in
the smallest client segment, the Big N fee premiums increased relatively over time.
The findings in cross-country studies regarding the existence and magnitude of Big N fee
premiums are also contradictory. Carson et al. (2012) suggested that research regarding fee
premiums should be conducted in other geographical audit markets to advance knowledge
acquisition in this field. Country- and market-specific variables should also be examined to
explain why the audit fee premium differs across countries. Choi et al. (2008) provided
cross-country variations in audit fee premiums and suggested that the country- and/or
market-specific litigation environment affects audit pricing. Their findings demonstrated that
Big N audit fees were higher in countries and markets with weaker legal regimes (such as
India, Malaysia, Singapore, Pakistan and South Africa) to compensate audit firms for the
burden of higher litigation risks in the event of audit failure, which is consistent with the
argument that Big N auditors charge higher fees as compensation for their quality and
reputation. In addition to cross-country differences in legal regimes, Andre et al. (2011) suggest
that specific regulation of the national audit market can also explain differences in audit fees.
In summary, there are several reasons proffered to explain the existence of the Big N fee
premium: competition in the audit market, Big N market power and the underlying economics
of the audit market, the Big N reputation for higher audit quality and differences in country-
level and institutional factors. These studies shared the finding that fee premiums varied
across countries and across client segments. In particular, the evidence for the fee premium is
generally more pronounced in the small-client segment. Without attempting to interpret the
Big N premium as related to the quality attributes of an audit, this study uses Thailand as an
example and aims to examine the controversial arguments regarding audit price competition
in an emerging economy. Because of the mixed results from previous studies and because
audit pricing differs across countries, the non-directional hypothesis is developed as follows:

H1. If audit price competition follows an oligopolistic pattern (i.e. oligopolies – Big N
auditors – can always set prices above marginal cost) rather than a competitive
pattern, Big N auditors earn higher premiums than non-Big 4 firms in both the
small-and large-client market segment.
 JAEE 2.2 Auditing and the audit market in Thailand
7,1 The development of accounting practices in Thailand has been influenced by the government
rather than by professional accounting bodies. Thus, listed firms must follow rules and
regulations set by the Thai SEC, one of which concerns auditor choice. As in Australia, the
USA and the UK, listed firms can only purchase audits from auditors that are qualified under
SEC standards. In addition, the Big N in Thailand operates through partnerships with local
6 audit firms. The Big 6 became the Big 5 in 1998 when Price Waterhouse merged with Coopers
& Lybrand and then became the Big 4 when KPMG merged with Arthur Anderson after the
Enron accounting scandal in late 2002. Thus, the Big 4 consists of PricewaterhouseCoopers
ABAS, Ernst & Young, KPMG Poomchai and Deloitte Touche Tohmatsu Jaiyos. Although
foreign audit firms cannot operate in Thailand without local partners, the expertise and
quality of Big 4 audits should meet their worldwide standards.
Table I presents statistics for the audit market in Thailand as of 2011. Authorized auditors
can be classified into three main groups: the Big N, international auditors and local auditors.
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International audit firms are those that also operate overseas (e.g. Grand Thornton and Baker
Tilly), and local audit firms are those based in Thailand, such as Dharmniti Auditing and ANS
Audit. With respect to employing Big N and non-Big N auditors, 50.51 percent of firms employ
the Big 4 and 49.49 percent use non-Big N auditors. Partitioning the client firms into small and
large segments based on the median of their total assets demonstrates that approximately
68 percent of large clients are audited by Big N auditors, whereas non-Big N firms audit
65 percent of the small-client market. When the market is subdivided into small and large
segments using a fixed number of the smallest and largest firms as measured by total assets,
the dominance of the Big N in the large-client segment and non-Big N in the small-client
segment is made clear.

3. Methodology and data

3.1 Sample
The sample initially consisted of a total of 507 listed companies on the Stock Exchange of
Thailand (SET) as of the end of 2011. Financial data were collected from firms’ annual reports
and the minutes of shareholder meetings were reviewed for audit fee information. After
screening for missing information for all the variables and excluding banks and financial and
insurance companies due to their unique transactional and accounting structures, 390
non-financial companies remain in the sample. The sample is divided into segments based on
client size as measured by the median of firms’ assets (Chan et al., 1993; Johnson et al., 1995) and
also partitioned by selecting a fixed number of the 100 largest firms (SET100) and the
100 smallest firms in terms of asset size to reduce any ambiguity in identifying small- and
large-client subsamples (Francis and Stokes, 1986; Carson et al., 2004). The use of two client size
classes should provide a strong test of the association between client size and audit fees.

3.2 Model specification

Audit fees represent the costs of performing an audit, which are determined as a function of
client (auditee) characteristics and have a significant influence on an auditor’s efforts and on
the identity of auditors (Francis, 1984; Hamilton et al., 2008; O’Keefe et al., 1994; Palmrose,
1986; Simunic, 1980). The traditional audit fee model is characterized as the production cost
function affecting both auditors and auditee. The OLS regression used for both the small
and large-client segments is specified as follows:
LnðFeeÞ ¼ b0 þb1 SUBþb2 LOSS þb3 Big4
þb4 Quick þb5 Lev þb6 REC_INVENT


þb7; small; large dsmall; large  LnðTAÞ þb8 ROI þe
 Panel A: full sample classified by industries at the end of year 2011
Audit prices
Number of companies and Big 4 fee
Industry code Industry (frequency in full sample) % premiums
SERVICE Services 84 21.54
TECH Technology 38 9.74
PROPCON Property and construction 86 22.05
INDUS Industrial 76 19.49
RESOURC Resources 27 6.92 7
CONSUMP Consumer products 39 10.00
AGRO Agro Food Industry 40 10.26
390 100
Panel B: summary of number of companies audited by Big N and Non-Big N firm at the end of the year 2011
Number of companies
Audit firms (frequency in 387 observations) %
Big N
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KPMG Poomchai Audit Co., Ltd 49 12.92

Deloitte Touche Tohmatsu Jaiyos Audit 2.84
Co., Ltd 10
PricewaterhouseCooper ABAS Ltd 27 6.98
Ernst & Young office Ltd 111 28.68
197 50.51
Non-Big N (international and local)
SAMNAK-NGAN A.M.C. Co., Ltd 7 1.81
A.M.T. & Associates 9 2.33
ANS Audit Co., Ltd 11 2.84
AST Master Co., Ltd 9 2.33
D I A International Audit Co., Ltd. 22 5.68
Dharmniti Auditing Co., Ltd. 19 4.91
Grant Thornton 5 1.81
Karin Audit Company Limited 20 5.17
M.R. & Associates Co., Ltd. 7 1.81
Office of Pitisevi 8 2.07
S.K. Accountant Service Co., Ltd. 16 4.39
Dr Virach and Associates 13 3.36
Othersa 47 10.08
193 49.49
390 100
Panel C: summary of number of companies audited by Big N and Non-Big N firm at the end of the year
partitioned by client segments
Partitioned by total asset’s median
Audit firm Full sample Small segment Large segment
Big N 197 (50.51%) 64 (34.97%) 123 (67.58%)
Non-Big N 193 (49.49%) 119 (65.03%) 59 (32.42%)
Partitioned by a fixed number of smallest and largest
companies measured by total assets
Small segment (n ¼ 100) Large segment
(n ¼ 100) Table I.
Big N 24 (24.74%) 70 (70.00%) Descriptive statistic
Non-Big N 73 (75.26%) 30 (30.00%) for auditing service
Note: aIncluded in “Others” are non-Big N audit firms with the frequency of o5 market

The client’s risks and complexities include the number of its subsidiaries, auditee size
(measured by the natural log of total assets), return on investment, the proportion of
inventory and receivables to total assets, leverage, the proportion of current assets (less
inventories) to current liabilities and losses. The traditional audit fee model has been used
 JAEE continuously in the audit fees literature; however, different variables of interest have been
7,1 added to the standard model (Francis and Simon, 1987; Francis and Stokes, 1986; Palmrose,
1986; Gul, 1999; Carson et al., 2012; Fung et al., 2012; Campa, 2013; Eshleman, 2013).
The model can be specified as a linear regression, which has been shown to be one of the
model’s most effective functional forms when certain variables are omitted (Cropper et al.,
1988). However, Bell et al. (1994) indicated that the coefficient of the natural log of total
8 assets tends to vary with client size. To address the non-linear relation between client size
and audit fees, the interaction variable between the natural log of assets and the indicator of
small and large auditee is included in the model (Carson et al., 2004, 2007). Table II presents
the variable descriptions and their predicted signs.

4. Results and analysis

Table III presents the descriptive statistics for all the variables used in this study.
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The sample is partitioned into subsamples of small and large auditees using the traditional
asset median and a fixed number of the smallest and largest auditees (as measured by total
assets). Segmenting the clients by asset median, the asset base of large clients is twice as
large as the asset base of small clients. However, fixing the number of small and large
auditees yields a six-fold differential in terms of the total assets of large compared with
small auditees, which indicates that the subsample of small clients consists of firms that are,
in fact, small when compared with those in the large-client segment.
Table IV provides the correlation matrix for all the variables and suggests that
collinearity problems among the independent variables are not really a concern for this
study. Table V presents the estimation results from the OLS model of small and large
auditees. The adjusted R2 values are in the range of 48.94-63.82 percent. Panel A of Table V
reports the findings from the subsample that classified the small- and large-client segments
using a fixed number of the 100 smallest and the 100 largest auditees, as measured by total
assets, and the results show that there is a Big N fee premium across the market
segmentation and Big N price differentiation in both the small- and large-client segments.
Thus, contrary to the findings of several studies conducted in the US, Australia and the UK
audit markets that suggest that the Big N audit price is competitive in the large-client
segment due to Big N auditors’ economies of scale, there is Big N price differentiation in both
the small- and large-client segments in an emerging audit market like Thailand. In other
words, the big audit firms tend to charge higher audit prices to both large and small clients.
These findings from the Thai audit market make several interesting contributions to the
extant audit fee literature. The findings demonstrate the potential existence of Big N market

Variable Predicted sign Explanation

Ln (Fee) ¼ Natural log of total audit fees

Ln (TA) + ¼ Natural log of total assets
SUB + ¼ The square root of the number of client’s subsidiaries
LOSS + ¼ 1 if loss incurs in any of the past 3 years
REC_INVENT + ¼ Client’s total inventories and receivables to total asset
QUICK − ¼ Client’s current asset (less inventories) to current liabilities
LEV + ¼ Client’s total liabilities to total equities
ROI − ¼ Earnings before tax to total assets
Big4 + ¼ 1 if audit firm is one of the Big N auditors, otherwise ¼ 0
Table II. OTHER ¼ 1 if audit firm is non-Big 4 or Ernst & Young, otherwise ¼ 0
Variable definition PWC ¼ 1 if audit firm is PricewaterhousCoopers, otherwise ¼ 0
and expected DELOITTE ¼ 1 if audit firm is Deloitte Touche Tomatsu, otherwise ¼ 0
relationship KPMG ¼ 1 if audit firm is KPMG, otherwise ¼ 0
 Panel A: descriptive statistics on all variable for small- and large-client segments partitioned by total asset’s
Audit prices
median and Big 4 fee
Partitioned by total asset’s median premiums
Sample of small clients Sample of large clients
Full sample (n ¼ 183) (n ¼ 182)
Variable Mean SD Mean SD Mean SD
Audit fee (Baht) 1,699,165 2,052,512 1,162,949 1,010,329 2,247,805 2,657,762
Total asset (million Baht) 17,991.787 75,284.859 1,495.874 752.138 3,457.833 104.143 9
SUB 1.694 7.032 1.109 4.036 2.390 9.317
LOSS 0.397 0.489 0.486 0.501 0.318 0.467
REC_INVENT 0.327 0.217 0.345 0.209 0.306 0.226
QUICK 2.181 0.030 2.861 13.176 1.912 0.054
LEV 0.438 0.006 0.401 0.262 0.214 0.023
ROI 0.083 0.111 0.065 0.121 0.999 0.096
Big4 0.51 0.50 0.349 0.478 0.675 0.469
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Panel B: descriptive statistics on all variables for small and large client segments partitioned by a fixed number of
smallest and largest companies as measured by total assets
Partitioned by a fixed number of smallest and largest
companies measured by total assets
Sample of small clients Sample of large clients
Full sample (n ¼ 100) (n ¼ 100)
Variable Mean SD Mean SD Mean SD
Audit fee (Baht) 1,699,165 2,052,512 1,066,210 1,095,221 2,682,890 3,295,490
Total asset (million Baht) 17,991.787 75,284.859 916.530 35.984 5,868.123 136.106
SUB 1.694 7.032 1.280 5.077 3.300 12.144
LOSS 0.397 0.489 0.550 0.500 0.290 0.456
REC_INVENT 0.327 0.217 0.348 0.216 0.252 0.215
QUICK 2.181 0.030 4.211 17.713 1.361 1.963
LEV 0.438 0.006 0.378 0.285 0.479 0.214
ROI 0.083 0.111 0.063 0.121 0.096 0.110 Table III.
Big4 0.51 0.50 0.27 0.446 0.700 0.460 Descriptive statistics

SUB LOSS Big4 QUICK REC_INVENT Ln(TA) ROI LEV

SUB 1.000
LOSS 0.023 1.000
Big4 0.035 −0.143 1.000
QUICK 0.039 0.055 −0.064 1.000
REC_INVENT −0.103 −0.014 −0.03 −0.117 1.000
Ln(TA) 0.128 −0.199 0.322 −0.071 −0.169 1.000 Table IV.
ROI 0.007 −0.429 0.151 −0.027 0.042 0.222 1.000 Correlation matrix
LEV 0.075 0.315 0.041 −0.221 0.122 0.146 −0.323 1.000 of all variables

power in the Thai auditing market. Although there is a public signal regarding audit
quality, the Big N price differentiation does not decrease; instead, price differentiation
substantially increases across both the small- and large-client market segments. Moreover,
these results might signal to regulators that the Thai audit market appears to be less
competitive and that there should be more concern regarding the real quality of auditing
services that correspond to their high prices.
The predicted signs of the control variables hold for five of the variables in the
small-client segment and for seven variables in the large-client segment. Those signs that
are the reverse of what was predicted are statistically insignificant. Client size (measured by
 JAEE Panel A Partitioned by a fixed number of smallest and largest auditees as
7,1 measured by total assets
Full sample
(n ¼ 362) Small auditee (n ¼ 100) Large auditee (n ¼ 100)
Variable Coefficient p-value Coefficient p-value Coefficient p-value
Ln(TA) 0.167 0.000** 0.056 0.520 0.249 0.000**
SUB 0.303 0.000** 0.307 0.000** 0.265 0.000**
10 LOSS −0.043 0.395 −0.022 0.804 0.079 0.499
REC_INVENT 0.024 0.815 −0.396 0.047* −0.076 0.751
QUICK −0.0003 0.714 −0.0005 0.663 −0.021 0.256
LEV 0.295 0.004** 0.229 0.142 0.207 0.690
ROI −0.220 0.388 0.218 0.418 −0.235 0.469
Big4 0.354 0.000** 0.305 0.005** 0.325 0.005**
F value 66.91 25.84 20.07
Adjusted R2 63.82% 48.94% 63.14%
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Panel B Partitioned by total asset median

Small auditee (n ¼ 182) Large auditee (n ¼ 180)
Variable Coefficient p-value Coefficient p-value
Ln(TA) 0.135 0.014* 0.178 0.000**
SUB 0.368 0.000** 0.272 0.000**
LOSS −0.0001 0.998 −0.070 0.351
REC_INVENT −0.008 0.953 0.045 0.766
QUICK −0.0003 0.793 −0.033 0.014*
LEV 0.293 0.022* 0.159 0.365
ROI 0.120 0.686 −0.495 0.197
Table V.
Results from the audit Big4 0.335 0.000** 0.373 0.000**
fee model for the F value 38.24 36.13
2
small- and large-client Adjusted R 51.93% 60.75%
segments Notes: *p-value o0.05; **p-valueo0.01 (one-tailed)

the natural log of total assets), number of subsidiaries and Big N auditors have a
significantly positive relation to audit fees for the large-client segment. Surprisingly, the
client size variable becomes insignificant in the group of the 100 smallest auditees. Less
variation in the total assets of the smallest auditee group might possibly explain the
insignificant association between client size and audit fees. It is also notable that the debt
ratio appears to play a role in determining audit fees, which contradicts evidence from
developed markets. Audit fees tend to increase as the level of leverage increases.
To test the robustness of the results, the audit fee model is also run for the sample in
which the small- and large-client segments are classified by the median of total assets.
The OLS results confirm that there is Big N price differentiation in both segments of the
market. With respect to the concern about a non-linear relation between client size and audit
fees, the interaction variables between the natural log of assets and the indicator variable for
small and large clients is included in the audit fee model (Carson et al., 2004). The coefficient
of the interaction variable between the log of assets and the indicator variable of large
clients from the untabulated report is negative and insignificant, which should at least
suggest that the non-linear relation between the log of total assets and the log of audit fees
does not seem to be a serious issue in this model. Thus, on average, there is evidence of an
audit fee premium for Big N audit firms compared with other audit firms in both segments.

5. Additional analysis
This study performs further analyses by disaggregating audit pricing for each of the
Big 4 auditors to provide more insight into the characteristics of the Thai auditing market in
 both segments. Oligopoly seems to describe the Thai auditing market because Big N Audit prices
auditors can always charge above-average marginal costs in both the small- and large-client and Big 4 fee
market segments. Thus, the pricing among the oligopolists (Big N auditors) is studied more premiums
deeply for a fuller picture of the market. Because the large clients segment is dominated by
Big N auditors, it is also important to examine whether the intense competition among Big N
auditors in the large-client segment results in more competitive pricing. Rotemberg and
Saloner (1986) developed the supergame theoretical model to explain how oligopolies behave 11
when market demand fluctuates; in particular, when demand for the goods or services
produced by the oligopolies is high, these authors suggest that the equilibrium collusive
price must be reduced closer to the competitive level to maximize joint profit. Snyder (1996,
1998) extended the Rotemberg and Saloner (1986) model by viewing the “boom” period as
large buyers and also by emphasizing the intense competition among suppliers. He argued
that the price offered to buyers is a function of buyer size relative to the market and of the
surplus that the suppliers can extract from all buyers in the market. More specifically, the
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collusive price should be lower for large buyers than for small buyers. Thus, size can be at
least considered as a countervailing power for buyers over suppliers. In the present study, if
the audit market in Thailand can be described as oligopolistic, there should be hardly any
price differentiation (i.e. prices should be relatively similar) among Big N auditors,
particularly in the large-clients segment where demand for Big N auditors is high.
Table VI presents the results of additional tests of audit pricing among Big N auditors
that examine whether the prices charged among Big N auditors differ significantly.
The variable OTHERS is developed to test the hypothesis. Ernst & Young, which offers the
lowest average audit price among the Big 4 in Thailand, is dropped from the model, and the
OTHERS variable is added to capture the pricing of the Ernst & Young variable in
comparison with that of the other three auditors. Specifically, the audit price of
PricewaterhouseCoopers, KPMG and Deloitte Touche Tohmatsu are compared with the
Ernst & Young price. The results suggest that PricewaterhouseCoopers, Deloitte Touche
Tohmatsu and KPMG charged significantly higher prices than Ernst & Young when the
client was small. In particular, PricewaterhouseCoopers and Deloitte Touche Tohmatsu
charged an average of 40 and 47 percent more than Ernst & Young. KPMG charged
25 percent more than Ernst & Young, but this amount is not highly significant. Thus, there
is evidence of within Big N concentration in the small-client market. However, as clients
become larger in size, the results are different and demonstrate that the audit price charged
among Big N auditors is lower after a certain point, and the differentiation in audit pricing
begins to decline with client size. In the segment with the 100 largest clients, the audit price
charged by PricewaterhouseCoopers, Deloitte Touche Thomatsu and KPMG do not
significantly differ from the lowest price offered by Ernst & Young. The effect is to prevent
a Big N auditor from undercutting the price and capturing all the demand (clients) because
Big N auditors are perceived to provide similar audit quality to one another. Therefore, these
findings strengthen the notion that the Thai auditing market is characterized by
oligopolistic characteristics, i.e., to maximize and sustain the joint profit of Big N auditors,
the subgame-perfect equilibrium is to charge lower collusive prices to large clients. Thus,
when Big N market power is countervailed by larger clients, the audit pricing among these
firms will become more competitive.

6. Limitations
Some limitations in this study must be addressed. The analysis is based solely on one-year
cross-sectional data. The use of data from an extended time span should provide more
insightful understanding regarding Big N price differentiation and the level of
competitiveness in the auditing market. However, the findings from this study should
provide a preliminary background for the audit market environment and audit price
 JAEE Panel A Partitioned by a fixed number of smallest and largest auditees as
7,1 measured by total assets
Full sample
(n ¼ 360) Small auditee (n ¼ 100) Large auditee (n ¼ 100)
Variable Coefficient p-value Coefficient p-value Coefficient p-value
Ln(TA) 0.187 0.000** 0.057 0.564 0.228 0.000**
SUB 0.305 0.000** 0.311 0.000** 0.268 0.000**
12 LOSS −0.002 0.963 0.042 0.653 0.109 0.351
REC_INVENT 0.158 0.135 −0.326 0.089 −0.076 0.751
QUICK −0.002 0.008** −0.001 0.028** −0.021 0.256
LEV 0.004 0.000** 0.005 0.000** 0.207 0.690
ROI −0.192 0.404 0.682 0.026** −0.235 0.469
KPMG 0.250 0.000** 0.146 0.072 0.238 0.065
DELOITTE 0.471 0.001** 1.134 0.000** 0.359 0.068
PWC 0.399 0.000** 0.818 0.000** 0.178 0.239
−0.056 −0.012 −0.253
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OTHERS 0.242 0.910 0.004**

F value 40.34 8.25 13.46
Adjusted R2 59.88% 45.13% 58.55%
Panel B Partitioned by total asset median
Small auditee (n ¼ 180) Large auditee (n ¼ 180)
Variable Coefficient p-value Coefficient p-value
Ln(TA) 0.148 0.021* 0.175 0.000**
SUB 0.354 0.000** 0.277 0.000**
LOSS 0.034 0.613 −0.052 0.508
REC_INVENT 0.103 0.498 0.114 0.465
QUICK −0.001 0.021* −0.035 0.024*
LEV 0.004 0.000** 0.030 0.316
ROI 0.095 0.727 −0.419 0.273
KPMG 0.286 0.016* 0.216 0.009**
DELOITTE 0.627 0.003** 0.255 0.108
Table VI.
PWC 0.563 0.000** 0.332 0.004**
Results from
audit fee model for the OTHERS −0.009 0.900 −0.073 0.263
small- and large-client F value 40.44 24.14
segments within Adjusted R2 50.34% 57.16%
Big N auditors Notes: *p-value o0.05; **p-valueo0.01 (one-tailed)

differentials in Thailand. It is also notable that the adjusted R2 value of the small-client
segment is relatively less than that of the large-client segment; the lower R2 value is due to
the traditional audit fee model that is appropriately specified for the small-client segment, as
denoted in Carson et al. (2004). These results must be interpreted with care due to the
limitations stated above. Nonetheless, the results should at least be useful in understanding
the audit market in Thailand; with a market for auditing that is similar to that in the USA
(in which Big N auditors only dominate the large auditee market), our results present
findings that conflict with those from studies of the US market.

7. Conclusion
This study investigates the Big N fee premium in the market for auditing services
in Thailand. Consistent with Gul (1999), who examined the fee premium in the
Hong Kong audit market, the results of the present study demonstrate the existence of a
Big N fee premium in both the small- and large-client segment. Segmenting auditees
into small and large sizes based either on the median of total assets or on a fixed
number of the 100 smallest and 100 largest firms, the results confirm the presence of Big
N price differentiation.
 The mixed results regarding the audit fee premium across countries are generally Audit prices
discussed using economic explanations, which might be summarized into the following two and Big 4 fee
main arguments, both of which are controversial: Big N auditors demonstrate competitive premiums
pricing and product differentiation and non-Big N auditors demonstrate product
differentiation and diseconomies of scale. An important component of these arguments is
based on differences in the auditing market characteristics in each country and whether Big
N auditors, in particular, dominate the entire market. In recent years, cross-country analyses 13
have been conducted to advance the understanding regarding the variation in audit fees.
The findings of this study should lend support to the proposition that single-country audit
fee analysis based on particular audit market characteristics may be insufficient to
accommodate the conflicting results regarding fee premiums in different countries. Choi et al.
(2008) suggested that institutional factors at the country level, such as the litigation
environment, might also play a role in explaining audit fee variations. The advantage of
studying Big N fee premiums in Thailand is that the Big N auditors only dominate the large
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auditee market in the Thai audit market, which is similar to the USA and Australian audit
markets. However, as opposed to the USA, Thailand is characterized by a weak legal regime, as
classified in Choi et al. (2008), and the Big N audit price differentials are likely to be significantly
large compared with non-Big N auditors. Therefore, contrary to the findings of Francis and
Stokes (1986), Carson et al. (2012) and Ferguson et al. (2013) that Big N auditors only earn fee
premiums in the small auditee segment, there is evidence of a Big N fee premium in both the
small- and large-client market in Thailand despite the similar characteristics of the market for
auditing services. The findings from this study should also be a signal to regulators concerning
the market power of the Big N auditors and audit fees. In particular, whether the audit market
in Thailand remains competitive or whether there is a possible anticompetitive effect of a few
dominant players in the Thai audit market might be of interest to regulators. Further studies
should address how the pattern of audit fees changes before and after the emergence of Big N
audit firms and the audit cost structure of audit firms to provide more insights regarding the
importance of audit market concentration on audit fees. The question as to which other specific
instructional factors lead to the existence of Big N fee premiums in both small- and large-client
segments should also contribute to the audit fee literature.

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Further reading
Carson, E. and Fargher, N. (2007), “Note on audit fee premiums to client size and industry
specialization”, Accounting and Finance, Vol. 47, pp. 423-446.
Chung, D.Y. and Lindsay, W.D. (1988), “The pricing of audit services: the Canadian perspective”,
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quality”, Journal of Accounting and Public Policy, Vol. 15 No. 1, pp. 55-76.
Firth, M. (1985), “An analysis of audit fees and their determinants in New Zealand”, Auditing: A Journal
of Practice & Theory, Vol. 4 No. 2, pp. 23-37.
Gul, F.A. (1991), “Audit prices, product differentiation and economic equilibrium”, Auditing: A Journal
of Practice & Theory, Vol. 18 No. 1, pp. 90-100.

Corresponding author
Thanyawee Pratoomsuwan can be contacted at: thanyawee.pra@mahidol.ac.th

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