Do Auditors Price Proposed Accounting Standards?

I examine the anticipatory effects of proposed Financial Accounting Standards Board (FASB) accounting standards on initial-engagement audit pricing. Accounting standards often have a substantial effect on a firm’s’ reported financial outcomes, and implementation and adherence to new accounting standards is often costly and effort intensive for adopting firms. Unlike adopting firms, auditors largely benefit from increased effort as audit fees typically include a profit margin with every hour of work billed to the client. To the extent that proposed standards represent plausible increases in expected future effort by the auditor, such standards also represent increases in expected future profits to the auditor. Leveraging theory from DeAngelo (1981), I predict and find that audit-effort-increasing accounting standards represent future quasi-rents to auditors and result in discounted initial-year audit fees. Further, I provide evidence that such an effect only occurs as a result of competition in the audit market. My findings support prior analytical studies which suggest that barriers to competition allow auditors to forego initial audit fee discounts (e.g., DeAngelo, 1981; Chan, 1996).