SUMMARY: Legislators, regulators, and the media have expressed concerns that auditors “lowball” the fees for initial‐year audits and that such fee discounts can lead to reduced audit quality. We hypothesize that initial‐year audit fee discounts will be less likely in the post‐SOX period than in the pre‐SOX period. Using both fee‐levels and fee‐changes models, we find that Big 4 clients receive initial‐year audit fee discounts of about 24 percent in 2001; this finding is consistent with results from many prior studies that have examined various periods prior to SOX. However, we find that in 2005–2006 Big 4 clients pay an initial‐year audit fee premium of around 16 percent. We also document that the Big 4 are much less likely to serve as a successor, following an auditor change, in 2005–2006 than in 2001. Overall, the findings suggest that concerns about initial‐year audit fee discounts are not supported by empirical evidence in the post‐SOX period. The results also suggest that the Big 4 have become more conservative in the post‐SOX period with respect to client acceptance and pricing decisions.
