Does Product Similarity of Audit Clients Influence Audit Efficiency and Pricing Decisions?

We examine how client product similarity within an auditor’s portfolio affects audit efficiency and pricing decisions. Using a unique set of intra-portfolio client-level data, we find that clients with product offerings more similar to those of other clients in the auditor’s portfolio are charged lower audit fees and experience a shorter audit reporting lag, suggesting that product similarity contributes to audit efficiency. In a cross-sectional analysis, we also find that the effect of product similarity on fee reduction is greater when knowledge transfer across clients is more useful in improving audit efficiency. Finally, we find that industry specialists reduce fee premiums for clients whose products are more similar to those of other clients in their portfolios, consistent with the conjecture that client product similarity helps specialists build up their market positions while improving their audit efficiency