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Abstract
This study examines vertical product differentiation within the Big 4 audit firms in the Australian audit market and potential pricing effects resulting from this differentiation. Assuming a competitive Big 4 audit market, systematically higher prices pertaining to one particular Big 4 audit firm is indicative of utilisation of a product differentiation strategy. A firm-wide premium implies existence of vertical product differentiation or quality differentiation. I single out PricewaterhouseCoopers (PwC) as the firm which is most likely to be using vertical product differentiation as its predecessor firm Price Waterhouse is historically considered to be the most prestigious of the Big N firms. In particular, I investigate if there is evidence of a PwC premium relative to the other Big 4 audit firms. Using a sample 5,686 observations over the period 2000 to 2009, I find evidence of a PwC audit fee premium in Australia on average and in specific years. Over this period, after controlling for client attributes, Ernst and Young (EY), KPMG and Deloitte (DT) have 9.7%, 10.8% and 12% lower audit fees than PwC, respectively. I also explore the alternative explanations of location, office size, and auditor industry specialisation in assessing the robustness of these findings. Using size and industry matched samples and propensity score matched samples, I further find that the PwC premium identified is a result of PwC being differentiated as a firm rather than having differentiated clients. My findings are of interest to audit researchers, regulators, auditors and auditees because pricing differentiation by PwC poses implications for future audit research, audit regulation and auditor selection. The identification of a PwC premium highlights a new dimension of product differentiation (vertical or quality differentiation) within the Big 4 audit market.