Determinants of Audit Engagement Profitability

Abstract

ABSTRACT We examine determinants of audit engagement profitability using proprietary data from the national office of a Big 4 public accounting firm in Canada. We verify through interviews with senior audit partners that the audit realization rate is the primary measure used to assess engagement-level profitability, and use the former to proxy for engagement profitability in our archival analysis. We find that engagement profitability is positively associated with the firm's assignment of lead senior audit managers, as identified by the national office, and its delivery of intangible client service dimensions, such as communication, customization, and responsiveness (obtained from satisfaction surveys of client management and audit committee chairs). We find no evidence that audit quality, measured by discretionary accruals and audit adjustments, is sacrificed to attain higher engagement profitability. We discuss implications for regulation and competition in audit markets.