Analysis of the Determinants of Audit Fees for Danish Financial Institutions: The Effect of Concentration on Price

Christina Lykke Bruun-Andersen & Louise Elise Johansen

Student thesis: Master thesis


In the wake of the financial crisis, where several cases of auditor misconduct were identified for the audits leading up to the default of multiple financial institutions, the Danish government decided to implement additional requirements to the auditors leading the audit of financial institutions. The consequence was a certification scheme with strict requirements to the amount of billable hours the individual auditor needs to have had in relation to auditing financial institutions. The aim was to ensure that the auditors had the sufficient capabilities going forth. The fear by multiple partakers was that the scheme would lead to a higher concentration among auditors for financial institutions. Firstly, it is shown that the number of individual auditors signing the financial statements for the financial intuitions has declined significantly, leaving only 40 certified auditors in April 2018. The same decline is seen in the number of auditing firms, which have at least one certified auditor. Furthermore, the scheme is seen as a high barrier to entry into the market for new suppliers of auditing services to the financial institutions. Thus implying the supply of auditors to the financial institutions has become very concentrated. Secondly, this thesis adds to the scarce number of studies related to the determinants of audit fees for financial institutions. We develop a model in order to explore the determinants for the audit fees for Danish financial institutions for the period 2011-2016. The model is based on the same methodology applied by the existing literature, which suggests that audit fees are influenced by auditor effort, the auditor’s residual business risk and a profit margin. A large proportion of the auditing fee can be determined by the size of the auditee. However, the explanatory power of size diminishes as the client becomes larger. The effect of risks characteristic for banks i.e. liquidity-, capital-, market-, credit-, and operational risk is explored. Auditors are found to value credit, capital and liquidity risk, when the audit fee is determined. Firm characteristics such as being listed, the number of branches, or having an internal audit function are all shown to have a significant effect on the audit fee. It is further shown that the two market leaders, Deloitte and PwC have been able to price their services at a premium compared the other auditors in the market. Despite the certification scheme having resulted in a high degree of concentration, there is no evidence to suggest that this has had an adverse effect on the audit fees. Such result is in line with previous studies examining the effects of concentration on audit fees.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2018
Number of pages104
SupervisorsThomas Riise Johansen