Empirical study of risk premiums in the audit market of non-Big 4 auditors in Spain

This study investigates whether Spanish non-Big 4 auditors assess the business risk in their audit pricing decisions. According to the audit pricing model of Simunic (1980), the audit fees are a function of the audit effort and the auditor's client specific risk. In this study we proxies the auditors' perceived business risk by financial distress and audit risk. We test our research question with a sample of 607 companies, non Big 4 audited, using fee data for the period 2001-2009. After direct control of audit effort through audit hours, we fin a statistically significant relationship between the company financial distress and audit risk and audit fees paid to non-Big 4 auditors, which provide empirical evidence that fee contain a risk premium. Supplemental analyses show that the risk premium is affected by the tenure of the engagement. We also find that for clients purchasing additional non audit services the fees contain a risk premium. We results are robust to different specifications of the audit fee model.