Ajpt 2021 176

AUDITING: A JOURNAL OF PRACTICE & THEORY American Accounting Association
Vol. XX, No. XX DOI: 10.2308/AJPT-2021-176

MONTH YEAR
pp. 1–24
Does Internal Competition among Audit Partners Affect

Audit Pricing Decisions?
Ahrum Choi
Sungkyunkwan University
Downloaded from http://publications.aaahq.org/ajpt/article-pdf/doi/10.2308/AJPT-2021-176/105294/ajpt-2021-176.pdf by guest on 27 March 2024

Sunhwa Choi
Seoul National University
Jaeyoon Yu
Central Michigan University
SUMMARY: This study examines whether competitive pressure from peers within a local office (i.e., internal
competition) affects audit partners’ audit pricing decisions. Using U.S. audit partner data from 2016 to 2022, we find
that audit partners respond to internal competition by charging their clients lower audit fees. The effect is more
pronounced for initial audit engagements, in more competitive local audit markets, and when peers share similar
personal attributes, such as sex and experience. However, the effect is weaker for industry specialist audit partners.
We also find evidence that internal competition is negatively associated with audit quality for non-Big 4 clients.
Overall, this study provides initial evidence of the effect of internal competition among audit partners on audit
outcomes.
Keywords: audit partner; audit pricing; audit quality; internal competition; competitive pressure; social comparison.
I. INTRODUCTION
I
nternal competition among peers within an organization affects individuals’ incentives and behavior (Kandel and
Lazear 1992; Huddart and Liang 2005; Parker and Ruschena 2011). Partners in audit firms face competitive pres-
sure from other partners within a local office (i.e., internal competition) because their compensation and promotion
are often linked to their performance relative to peers (Knechel, Niemi, and Zerni 2013; Deloitte 2018; KPMG 2018;
Ernstberger, Koch, Schreiber, and Trompeter 2020; Kelly, Dinovitzer, H. Gunz, and S. Gunz 2020; Dekeyser,
Gaeremynck, Knechel, and Willekens 2021). In addition, social psychology literature highlights that people have an
innate desire to compare themselves to similar others and aspire to outperform them (Festinger 1954; Garcia, Tor, and
Schiff 2013; Kuselias, Lauck, and Williams 2021). Although a growing body of research has examined the effect of vari-
ous partner characteristics and incentives on audit outcomes, no studies have explored how internal competition affects
audit partner behavior. Using U.S. audit partner data, we investigate whether internal competition affects audit fees,
which is an important and directly observable performance measure (Knechel et al. 2013; Coram and Robinson 2017).
We thank the two anonymous reviewers and Udi Hoitash (editor) for their useful comments and suggestions. We also acknowledge helpful comments
from Jaehan Ahn, Daniel Aobdia, Feng Chen, Jong-Hag Choi, Michael Erkens, Wonsuk Ha, Bum-Joon Kim, Yongtae Kim, Lasse Niemi, Laurence
Van Lent, Marcel Van Rinsum, Scott Seavey, Moon Chul Shin, Donghui Wu, Huai Zhang, and the seminar and conference participants at Erasmus
University Rotterdam, Hong Kong Baptist University, KU-KAIST Joint Research Seminar, Sungkyunkwan University, the 2018 Hong Kong Junior
Faculty Conference, the 2018 JAAF Conference, the 2018 Workshop on Audit Quality, and the 2020 Korean Accounting Association Winter
Conference. Sunhwa Choi appreciates the support from the Institute of Management Research at Seoul National University. Jaeyoon Yu appreciates
the support from Erasmus University Rotterdam and Central Michigan University.
Ahrum Choi, Sungkyunkwan University, Business School, Seoul, South Korea; Sunhwa Choi, Seoul National University, Business School, Seoul,
South Korea; Jaeyoon Yu, Central Michigan University, College of Business Administration, School of Accounting, Mount Pleasant, MI, USA.
Editor’s note: Accepted by Udi Hoitash, under the Senior Editorship of Jayanthi Krishnan.
Submitted: December 2021

Accepted: October 2023
Early Access: February 2024
1
2 Choi, Choi, and Yu
We expect that audit partners facing greater internal competition have incentives to charge lower audit fees, which
may help them generate more revenue by attracting new clients. Previous research suggests that high audit fees can lead
to client dissatisfaction and loss of clients (Ettredge, Scholz, and Li 2007; Asthana, Khurana, and Raman 2019), and
auditors often use fee discounting to attract new clients (Ghosh and Lustgarten 2006). Thus, greater internal competition
can be associated with lower audit fees. However, the extent of internal competition may not be significantly related to
audit fees if engagement partners have little discretion in audit pricing decisions under a centralized bidding process in
audit firms (Almer, Philbrick, and Rupley 2014).
To operationalize internal competition empirically, we draw on prior research suggesting that competitive pressure
increases with the number of peers in a given market (Nalebuff and Stiglitz 1983; Bognanno 2001; Nguyen 2017).
Specifically, we measure internal competition for each partner-year as the number of comparable peers, defined as
partners in the same office who work on engagements in overlapping industries. These partners are likely to compete in
various settings. For example, they may compete in the partner selection process during voluntary and mandatory

partner rotations within the audit firm (Daugherty, Dickins, Hatfield, and Higgs 2012; Dodgson, Agoglia, Bennett, and
Cohen 2020; Pittman, Wang, and Wu 2022). They may also compete for new clients in local audit markets. Moreover,
internal competition may stem from psychological factors. Research in social psychology indicates that individuals are
more likely to engage in competitive behavior with others, particularly when they frequently interact in proximity, such
as within the same office (Garcia et al. 2013).
Using a sample of 15,425 firm-year observations from July 2016 to June 2022, we examine how internal competition
affects audit fees. We include audit office fixed effects in our model to control for potential effects of various audit firm
and office characteristics on audit fees.1 This approach allows us to exploit within-office variation in internal competi-
tion. Our empirical model also controls for other factors that may affect audit fees, including local audit market compe-
tition, industry specialization at the office and partner levels, office size, and year and industry fixed effects. We find a
negative association between the degree of internal competition and audit fees. The finding suggests that audit partners
respond to internal competition by charging their clients lower fees, consistent with a strategic fee choice to attract
clients. In terms of economic significance, our results indicate that a change in the number of comparable peers from the
first quartile (one) to the third quartile (six) corresponds to a 2 percent reduction in audit fees. We find that this effect is
more pronounced for non-Big 4 clients. Our inferences remain similar in the change specification.
We perform a falsification test using nonaudit services. Since audit firms are not permitted to reward partners based
on nonaudit service fees (Securities and Exchange Commission (SEC) 2003), we expect internal competition to have a
minimal effect on the incentives of audit partners to sell nonaudit services. In line with our prediction, we find no signifi-
cant association between internal competition and nonaudit fees.
We conduct several cross-sectional tests to provide evidence that the relation between internal competition and audit
fees varies consistently with economic and psychological theory. These cross-sectional tests would mitigate the concern
that the association between internal competition and audit fees arises simply because both are affected by other unob-
servable factors, which would result in little cross-sectional variation in the association. First, we expect that the effect of
internal competition on audit fees is more pronounced for initial audit engagements as internal competition strengthens
partners’ incentives to attract new clients. Second, our findings are expected to be more pronounced in more competitive
local audit markets where it is more challenging for audit partners to attract new clients from other audit firms. Third,
industry specialist audit partners are less likely to reduce audit fees in response to internal competition because they
have a competitive advantage in attracting clients by providing high-quality audits (Zerni 2012). Finally, based on social
comparison theory in psychology, which suggests that people feel more competitive pressure from those with similar
attributes (i.e., sex and experience), we expect that partners are more likely to cut audit fees when their peers have similar
personal attributes (Festinger 1954; Garcia et al. 2013; Tafkov 2013). Our empirical results are consistent with these
predictions.
Next, we investigate the effect of internal competition on audit quality, as excessive competition among audit part-
ners may lead to a decline in audit quality. Employing three proxies of audit quality (financial statement restatement,
meeting earnings benchmarks, and recognition of goodwill impairment), we find that internal competition decreases
audit quality for partners of non-Big 4 auditors.
We perform several additional tests. First, our partner-level analysis suggests that audit partners who face greater
internal competition are more likely to attract new clients. These results are consistent with the idea that they may exert
greater effort toward client attraction. Second, we measure competitive pressure from external competitors (external
peer pressure), where competitors are defined as partners from different audit firms within the local market who work on
1
The inclusion of office fixed effects helps us control for potential confounding factors, such as compensation schemes, quality control mechanisms,
pricing policy, organizational culture, client composition, and cost of living in the city.
Auditing: A Journal of Practice & Theory

Volume XX, Number XX, 20XX
Does Internal Competition among Audit Partners Affect Audit Pricing Decisions? 3
engagements in overlapping industries. We find that this measure of external peer pressure is not significantly associated
with audit fees. Importantly, our main results are not affected by the inclusion of this measure. Third, we limit our sam-
ple to partners working on engagements in a single industry to mitigate concerns that partners who work on engage-
ments in multiple industries (and may lack industry expertise) drive our main results. We confirm that our results are
robust to this restricted sample. Finally, our results are robust to alternative measures of internal competition.
Our study makes important contributions to the literature and provides practical implications. First, by examining
the effect of internal competition on individual partners’ behavior using a sample of U.S. audit partners, this study pro-
vides initial evidence that internal competition affects audit outcomes above and beyond audit market competition.2
Although previous studies suggest that internal competition influences individuals’ incentives (Hannan, McPhee,
Newman, and Tafkov 2013; Luft 2016), few studies examine its effect in the context of the auditing profession. Our
study also offers new insights into the interaction between internal competition among audit partners and external com-
petition among audit offices in explaining individual partners’ audit pricing decisions.

Second, our study contributes to the research on audit partner behavior. Prior literature has examined how eco-
nomic incentives and partner characteristics affect audit outcomes (Lennox and Wu 2018; Lee, Nagy, and Zimmerman
2019; Pittman, Stein, and Valentine 2023; Aobdia, Siddiqui, and Vinelli 2021; Dekeyser et al. 2021; Gipper, Hail, and
Leuz 2021). However, it has paid little attention to the influence of competitive dynamics among individual audit part-
ners on audit fees and quality. Our study thus offers new insights into the internal competition among audit partners as
a determinant of audit outcomes beyond other partner characteristics.
Finally, our results have practical implications for both regulators and audit professionals. Our study highlights the
significance of competitive dynamics among individual audit partners as a determinant of audit partner behavior.
Recent studies indicate that partner compensation packages are increasingly performance based and commercially ori-
ented rather than based on equal profit sharing and professional orientation (Coram and Robinson 2017; Vandenhaute,
Hardies, and Breesch 2020). Such incentive systems can intensify internal competition, which, in turn, may affect part-
ners’ professional decisions (Marriage and Ford 2018; Mintz 2018; Kelly et al. 2020). Thus, our results suggest that audit
firms’ executive committees consider the potential effect of internal competition on individual partner behavior when
designing incentive systems.3
II. BACKGROUND AND HYPOTHESIS DEVELOPMENT
Individual Audit Partners

Engagement partners make key decisions in audits. Their incentives and characteristics affect various audit out-
comes (Lennox and Wu 2018), and an increasing number of studies provide evidence supporting this view. Using
Australian data, Taylor (2011) shows that individual partner characteristics are significantly related to fee premiums or
discounts after controlling for audit office characteristics. Zerni (2012) and Goodwin and Wu (2014) find that industry
specialist audit partners earn fee premiums, whereas Hardies, Breesch, and Branson (2015) report an audit fee premium
for female partners. Dekeyser et al. (2021) report that an individual auditor’s fee-based compensation, which can
encourage the partner to focus on attracting new clients, is associated with lower audit quality. Their finding suggests
that partners’ economic incentives have important implications for audit outcomes. Although audit fees are determined
by various factors (e.g., client attributes and local audit market structures), negotiated with the clients and approved by
managing partners, individual audit partners can exercise some discretion over audit pricing decisions. For example,
they participate in assessing client risk and determining the scope of work, thereby estimating necessary audit input. In
addition, they determine the resource allocation of audit inputs such as the composition of engagement teams and time
across different ranks (e.g., staff, senior, managers, partners) in the audit procedure. They also participate in fee negotia-
tions with clients.
2
Academics and regulators have extensively focused on the effect of audit market competition (i.e., competition among audit firms at the national or
local level) on audit outcomes. Several studies provide empirical evidence suggesting that audit market competition leads to lower audit fees
(Eshleman and Lawson 2017; Maher, Tiessen, Colson, and Broman 1992; Gerakos and Syverson 2015) and they often use market concentration as
an empirical proxy for competition (e.g., Brockbank, Do, and Lawson 2023). However, conflicting evidence exists about the relation between concen-
tration and audit fees (Pearson and Trompeter 1994; Numan and Willekens 2012). Furthermore, some studies have raised questions about whether
market concentration accurately reflects audit market competition (Numan and Willekens 2012; DeFond and Zhang 2014). Our study differs from
those in that we focus on internal competition. We believe that additional research is needed to understand the effect of various dimensions of compe-
tition, including internal competition.
3
Greater internal competition might be associated with greater overall revenue at the audit firm or office level, if enhanced client attraction potentially
improves overall revenue. However, we acknowledge that our study does not directly examine this possibility.

An important but largely unexplored issue in partner-level studies is whether audit partners are subject to competi-
tive pressure from their peers within a local audit office and, if so, how this internal competition affects their audit deci-
sions. Various disciplines, including economics, organizational behavior, and psychology, suggest that internal
competition within an organization significantly influences individuals’ behavior (Deutsch 1949). For example,
Kacperczyk, Beckman, and Moliterno (2015) show that internal competition in a mutual fund alters its managers’ risk-
taking behavior. Nguyen (2017) shows that the competition among financial analysts working in the same brokerage
firms affects their forecasting behavior. Based on a survey of lawyers in law firms, Parker and Ruschena (2011) suggest
that time-based billing and billable hour budgets make lawyers compete against each other within their workplaces and
could lead to unethical practices such as billing fraud. These studies suggest that internal competition among audit part-
ners is likely to affect their behavior.
Internal Competition among Audit Partners

We argue that audit partners are subject to competitive pressure from other partners in a local office for three rea-
sons. First, partners’ compensation and advancement to leadership positions are based on their individual performance
relative to peers (Deloitte 2018; KPMG 2018; Dekeyser et al. 2021). Specifically, most large accounting firms have
shifted from a traditional equal profit-sharing approach to a performance-based profit-sharing one (Coram and
Robinson 2017; Vandenhaute et al. 2020).4 Accordingly, a substantial within-firm pay gap exists between underperform-
ing and outperforming partners.5 In extreme cases, underperforming partners can be dismissed from the firm (Zeff
2003). For example, in 2019, KPMG announced its plan to cut one-tenth of its U.K. partners as part of restructuring
(Kinder 2019), highlighting the competitive environment of the accounting profession. Although such incentive systems
are designed to enhance individual partner motivation, they also create within-firm competition by encouraging individ-
uals to maximize their own performance, particularly short-term performance that is directly measurable (Morris and
Pinnington 1998; Coram and Robinson 2017; Kelly et al. 2020).
Second, partners within a local office compete for clients of other audit firms and also for those of colleague partners
during voluntary and mandatory audit partner rotations. Daugherty et al. (2012) suggest that partners engage in “audi-
tioning” during partner rotations, wherein clients select a new partner from a few candidates. Pittman et al. (2022) pro-
vide evidence that candidate partners who are close to the rotating-off engagement partners from prior teamwork are
more likely to be selected as successors in mandatory partner rotations. This finding is consistent with the idea that can-
didate partners compete with their peers during partner rotations. Moreover, Lee et al. (2019) find that the boards of
directors and top management teams of clients prefer audit partners with similar personal traits (e.g., sex and experience)
to their own. These results indicate that individual partner attributes are important factors in the auditor assignment
process, suggesting that partners face within-office competition, particularly from those with similar characteristics (e.g.,
industry expertise, location).
Finally, psychological theory suggests that social comparison creates competitive pressure within an organization.
Some incentive system features, such as pay transparency and a fixed reward pool for bonus allocation, further increase
individual comparison concerns (Festinger 1954; Garcia et al. 2013). Therefore, individuals face more pressure to
increase their current economic payoff relative to others under an open compensation system, which is commonly used
in accounting firms (Coram and Robinson 2017). In a similar context, Kelly et al. (2020) report that partners in law
firms are more likely to concede to the wishes of clients when profit is allocated in a subjective system and the informa-
tion on profit allocation is shared with all partners. This finding suggests that social comparison concerns can affect part-
ners’ behavior.
Internal Competition and Audit Fees

We expect that internal competition affects audit pricing decisions, among other audit outcomes, because audit fees
are linked to short-term economic interests and are directly observable. To the extent that increased competition directs
partners toward short-term economic benefits (Kelly et al. 2020) and partners’ revenue-generating ability affects their
compensation, they likely respond to internal competition by adjusting the way they charge audit fees to clients
(Knechel et al. 2013; Coram and Robinson 2017; Lennox, Wang, and Wu 2020; Vandenhaute et al. 2020). Specifically,
4
For example, individual performance measures are used to rank partners, and the profit pool is allocated based on their rank (Coram and Robinson
2017). Therefore, a significant portion of a partner’s compensation is linked to variable components, such as annual bonus and discretionary bonus,
that are partly determined by their individual performance. According to Ernstberger et al. (2020), the proportion of variable components in partner
remuneration among German audit firms ranges from 0 to 100 percent, with a mean of 50 percent.
5
Coram and Robinson (2017) report that the mean ratio of remuneration for partners at the 90th and 10th percentiles of profit distribution is 6.8 for
Big 4 firms in Australia. Knechel et al. (2013) report a ratio of 4.5 for Swedish Big 4 firms.

we expect that audit partners facing greater internal competition have incentives to charge lower audit fees, which can
help them generate more revenues by attracting new clients. Prior literature suggests that charging lower audit fees helps
retain existing clients (Ettredge et al. 2007; Asthana et al. 2019). The literature also provides evidence that auditors offer
audit fee discounts to attract new clients (Simon and Francis 1988; Ettredge and Greenberg 1990; Huang,
Raghunandan, and Rama 2009).6 Based on this, we formulate our hypothesis as follows:
Hypothesis: The degree of internal competition faced by audit partners is associated with lower audit fees.
Although we provided a directional prediction previously, internal competition may not be significantly related to
audit fees. Almer et al. (2014) report that engagement partners have less autonomy in the post-SOX period as they are
increasingly subject to firm-wide controls. If new clients are acquired through the centralized bidding process and assign-
ment, individual partners may have little discretion in audit pricing decisions.

III. RESEARCH DESIGN AND SAMPLE SELECTION
Measure of Internal Competition

We develop our empirical measure of internal competition based on the premise that internal competition faced by
an individual partner arises mainly from other partners who work on engagements in overlapping industries in the same
office. We use a local audit office as the domain of internal competition among audit partners because they are likely to
compete within the local office in various contexts.7 For example, some audit firms allocate bonuses to partners at the
office level (Carcello, Hermanson, and Huss 2000; Ernstberger et al. 2020). Furthermore, partners in the same office
compete (1) in the local audit market to poach clients from other audit firms and (2) in the partner selection process dur-
ing voluntary and mandatory partner rotations (Daugherty et al. 2012; Dodgson et al. 2020; Pittman et al. 2022).8
In measuring the degree of internal competition of audit partners, we consider the industry segment because partners
covering similar industries are more likely to compete against each other. For example, partners who specialize in the
technology industry are unlikely to compete with those specializing in the oil and gas industry. Consistent with this argu-
ment, Dodgson et al. (2020) report that 90 percent of their interviewees state that a partner’s industry expertise is an
important consideration in identifying candidate partners for upcoming rotations. Notably, our consideration of local
audit offices and industry segments is consistent with the social psychology literature, which suggests that social compar-
ison concerns and competitive pressure are more likely to arise among individuals who closely interact in geographically
proximate settings and share similar attributes (Garcia et al. 2013).
Following the economic theory of competition (Nalebuff and Stiglitz 1983), we claim that the extent of internal
competition increases with the number of comparable peers in a given market. This approach of using the number of
peers to measure internal competition is also used in other settings (Bognanno 2001; Nguyen 2017).9 Specifically, we
define our main proxy for internal competition (COMP) for partner j in office o in year t as the number of other partners
in office o in year t who work on engagements in industries that overlap with those of partner j.10,11 Industries are
defined using one-digit Standard Industry Classification (SIC) codes.12
6
Note that charging lower audit fees does not necessarily lead to lower engagement profitability, which is also an important performance metric,
because partners can reduce audit inputs to make up for lower revenues (i.e., audit fees).
7
Following the literature on audit office (e.g., Francis, Reichelt, and Wang 2005), we define the location of an audit office using the Metropolitan
Statistical Areas (MSAs). Thus, if an audit firm has multiple offices within an MSA, we treat them as a single office.
8
Partner relocation tends to occur when clients cannot be assigned to audit partners within an office (or from nearby offices) because such relocations
are costly for both the audit firms and individuals involved (Daugherty et al. 2012).
9
Nguyen (2017) measures internal competition among analysts in the brokerage firm by using the number of analysts within the firm who work on
the same industry around broker mergers and acquisitions. Similarly, studies on corporate tournaments use the number of senior executives compet-
ing for the CEO position as a measure of competition (Bognanno 2001).
10
In our sample, approximately 72.5 percent of audit partners serve as engagement partners for clients in a single industry. For the audit partners who
have clients across multiple industries, we aggregate the number of comparable peers across industries to construct COMP. Thus, COMP reflects
the overall level of internal competition faced by individual partners. We also employ alternative ways to measure internal competition, which are
discussed in more detail in the “Additional Tests” section.
11
COMP is measured for each 12-month period from July through June of the following year, which is consistent with the fiscal year of most account-
ing firms (e.g., PwC, Ernst & Young, and BDO). In untabulated tests, we use a partner’s client portfolios in years t1 and t (or years t and t+1) to
define COMP and find similar results.
12
We use one-digit, rather than two-digit, SIC codes for two reasons. First, in practice, audit firms classify industries broadly for their internal pur-
poses, which is more aligned with one-digit SIC codes. Second, this broad industry classification ensures some overlaps among partners within an
office-industry cohort, giving us sufficient variation in the measure of internal competition. Our results are robust when we use the Fama-French 12
industry classification.

TABLE 1
Sample Selection
Sample Selection Procedures n

Firm-year observations with the fiscal-year ends between July 1, 2016, and June 30, 2022, 38,987
from PCAOB AuditorSearch
Less:
Firm-years not matched with Audit Analytics (4,548) 34,439
Firm-years in financial industries (SIC codes 6000–6999) (8,661) 25,778
Firm-years not matched with Compustat (4,664) 21,114
Firm-years without variables necessary for main analyses (5,689) 15,425

Firm-year observations for main analyses 15,425
Regression Model
To test our hypothesis that the degree of internal competition faced by audit partners is associated with lower audit
fees, we estimate the following ordinary least squares (OLS) regression model:
FEE ¼ b0 þ b1 COMP þ b2 SIZE þ b3 LEV þ b4 NBS þ b5 NGS þ b6 INVREC

þ b7 CURR þ b8 ROA þ b9 LOSS þ b10 SGROW þ b11 MTB þ b12 FIRST
þ b13 OFFSIZE þ b14 EXT COMP þ b15 OFF ISA
þ b16 PTNR ISA þ b17 FEMALE þ office; year; and industry fixed effects þ e, (1)
where FEE is the natural logarithm of audit fees and COMP is a measure of internal competition, as previously defined.
A negative coefficient on COMP indicates that audit partners with greater internal competition charge lower audit fees.
To address concerns that audit firm and office characteristics that are correlated with internal competition also affect
audit fees, we include audit office fixed effects in our model. As a result, our estimation focuses on within-office variation
in internal competition. Regression model (1) includes a set of control variables, such as client-, audit firm-, audit office-,
and engagement partner-specific characteristics. The model also includes year and industry fixed effects to control for
unobservable year and industry effects (Burke, R. Hoitash, and U. Hoitash 2019; Lee et al. 2019), and standard errors
are clustered by client firm. Appendix A provides variable definitions.
Sample Selection
Public Company Accounting Oversight Board (PCAOB) Rule 3211 requires public accounting firms registered with
the PCAOB to disclose the names of engagement partners for audit reports issued on or after January 31, 2017. We
download audit partner data from AuditorSearch for client firms with fiscal year-ends between July 1, 2016, and June
30, 2022, which comprise 38,987 firm-year observations.13,14 We merge this initial sample with Audit Analytics to obtain
auditor-related information and exclude observations in financial industries (SIC codes 6000–6999). We then merge our
data with those from Compustat to obtain financial statement information and drop observations that lack the necessary
data to estimate our audit fee regression. This sample selection procedure yields a final sample of 15,425 firm-year obser-
vations. Table 1 presents the sample selection procedures for our main sample.
13
PCAOB’s AuditorSearch is publicly available from https://pcaobus.org/Pages/AuditorSearch.aspx. We downloaded Form AP filings on January 9,
2023. The initial sample with the audit firm country of the U.S. contains 94,908 filings. AuditorSearch classifies issuers into three groups:
(1) employee benefit plans, (2) investment company issuers, and (3) issuers that are neither employee benefit plans nor investment companies. We
delete the first two groups, which reduces the sample size to 48,284 filings. We restrict our sample to filings with a fiscal year-end between July 1,
2016, and June 30, 2022, resulting in a sample of 45,665 observations. We then delete observations without relevant firm-identifying information
and duplicate observations, which results in 38,987 observations. This forms our sample of AuditorSearch, as presented in Table 1.
14
Because PCAOB Rule 3211 requires the disclosure of engagement partners for audit reports issued on or after January 31, 2017, our sample does
not include some client firms with a fiscal year-end between July 1, 2016, and November 30, 2016. However, we note that most of the firms with a fis-
cal year-end on December 31, 2016, which consist of about 80 percent of U.S. public firms, are included in our sample because it normally takes
much longer than 30 days for audit reports to be issued. Given this, it is unlikely that this issue significantly affects our main inferences.

TABLE 2
Descriptive Statistics
Panel A: Sample by Audit Firms

Number of Audit Partners Number of Comparable
per Office Audit Partners
Number of
Office-Years Mean Median Mean Median
Deloitte 314 13.848 12 4.716 3
Ernst & Young 327 16.998 19 6.471 5
KPMG 341 11.678 12 4.337 3

PwC 298 16.759 14 6.794 3
Non-Big 4 1,673 4.803 3 2.269 1
Total 2,953 11.731 8 4.570 3
Panel B: Descriptive Statistics

Variables Obs. Mean Std. Dev. Q1 Median Q3
FEE 15,425 14.054 1.337 13.194 14.178 14.935
COMP 15,425 4.570 5.294 1.000 3.000 6.000
SIZE 15,425 6.667 2.296 5.106 6.801 8.254
LEV 15,425 0.222 0.190 0.036 0.203 0.355
NBS 15,425 0.956 0.516 0.693 0.693 1.386
NGS 15,425 1.009 0.681 0.693 1.099 1.609
INVREC 15,425 0.215 0.177 0.071 0.176 0.312
CURR 15,425 2.963 3.243 1.243 1.935 3.264
ROA 15,425 0.085 0.363 0.096 0.020 0.071
LOSS 15,425 0.416 0.493 0.000 0.000 1.000
SGROW 15,425 0.264 1.045 0.032 0.070 0.228
MTB 15,425 1.083 1.119 0.404 0.983 1.674
FIRST 15,425 0.046 0.209 0.000 0.000 0.000
OFFSIZE 15,425 16.804 1.883 15.562 17.200 18.321
EXT_COMP 15,425 0.404 0.213 0.462 0.327 0.271
OFF_ISA 15,425 0.338 0.473 0.000 0.000 1.000
PTNR_ISA 15,425 0.148 0.355 0.000 0.000 0.000
FEMALE 15,425 0.166 0.372 0.000 0.000 0.000
Panel A presents the number of audit office-years, the number of audit partners per audit office, and the number of comparable peers for each
Big 4 audit firm and non-Big 4 firms (as a group). Panel B presents descriptive statistics of the variables used in our analyses.
See Appendix A for variable definitions.
IV. EMPIRICAL RESULTS
Descriptive Statistics
Table 2, Panel A reports the number of audit office-years, audit partners per audit office, and comparable peers for
each of the Big 4 and non-Big 4 audit firms. Our sample includes 2,953 office-year observations (314, 327, 341, 298, and
1,673 office-years for Deloitte, Ernst & Young, KPMG, PwC, and non-Big 4 firms, respectively). The average (median)
number of audit partners per office is 11.731 (8). The mean and median values of the number of comparable peers
(COMP) in our sample are 4.570 and 3, respectively.15
Table 2, Panel B presents the descriptive statistics of variables used in the main analyses. We Winsorize all continu-
ous variables at the 1st and 99th percentiles to mitigate the effects of outliers. The median value of audit fees (FEE) is
14.178, which translates into US$1.44 million. Firms audited by industry specialist offices account for 33.8 percent of
15
Our main results remain similar when we exclude small offices (e.g., those with fewer than three, five, or ten partners).

our sample (OFF_ISA), whereas those audited by industry specialist partners constitute 14.8 percent (PTNR_ISA). In
our sample, 16.6 percent of observations are audited by female audit partners. About 67.1 percent of sample firms are
audited by one of the Big 4 auditors (untabulated).16
Main Results
Table 3 presents the regression results of estimating Equation (1) to test our hypothesis. Column (1) reports the
results using the full sample, including clients of Big 4 and non-Big 4 auditors. The coefficient on COMP (0.004;
t ¼ 2.41) is negative and significant, suggesting that audit partners facing greater internal competition offer fee dis-
counts. Since the regression model controls for various client-, office-, and partner-specific factors, the estimated coeffi-
cient on COMP reflects the effect of internal competition on audit fees above and beyond these factors.17 The result is
also economically significant. An interquartile change in COMP from one (Q1) to six (Q3) corresponds to a 2 percent
reduction in audit fees.18

To examine whether the effect of internal competition on audit fees varies by auditor type, we estimate Equation (1)
separately for Big 4 and non-Big 4 clients. As reported in columns (2) and (3), we find that internal competition is nega-
tively associated with audit fees for both samples and that the effect is more pronounced for non-Big 4 clients. The Chi-
square statistic that tests the difference in the coefficients on COMP between the Big 4 and non-Big 4 subsamples is
2.85, which is significant at the 10 percent level.19 The weaker effect for Big 4 clients can be attributed to more standard
audit pricing procedures in Big 4 firms (Pittman et al. 2023).
As a falsification test, we examine the association between internal competition and nonaudit fees. Since the SEC
prohibits audit firms from compensating audit partners based on nonaudit service fees (SEC 2003), internal competition
should have little effect on audit partners’ incentives for selling nonaudit services. We estimate Equation (1) with nonau-
dit service fees paid to the auditor (NASFEE) as the dependent variable. As reported in column (4), the coefficient on
COMP is not significant in the nonaudit fee regression, consistent with our expectations.
We also test our hypothesis using a change model to mitigate concerns relating to potential correlated omitted varia-
bles. Specifically, we regress the changes in audit fees (CH_FEE) on changes in internal competition (CH_COMP) and
changes in the control variables included in Equation (1). Table 4 reports the results from the change specification. The
coefficient on CH_COMP is negative and significant (0.002; t ¼ 1.74), suggesting that an increase in internal compe-
tition is associated with a decrease in audit fees. Overall, the results from the change specification provide evidence con-
sistent with that from the level specification.
Cross-Sectional Variations
We conduct several cross-sectional tests to gain further insight into the effect of internal competition on audit fees
from economic and behavioral perspectives. First, we examine whether internal competition affects the extent of audit
fee discounting on initial engagements. Partners have strong incentives to attract new clients because those who bring
new clients to the firm are highly valued in audit firms (Coram and Robinson 2017). Prior studies suggest that auditors
competing for new clients offer fee discounts in the initial year of the audit engagement (DeAngelo 1981; Simon and
Francis 1988; Ettredge and Greenberg 1990; Ghosh and Lustgarten 2006; Huang et al. 2009). Since internal competition
strengthens audit partners’ incentives to attract new clients, we expect the effect of internal competition on fee discounts
to be greater in initial audit engagements. To test this prediction, we augment Equation (1) with an interaction between
internal competition (COMP) and the indicator variable for initial audit engagements (FIRST). In column (1) of
Table 5, the coefficient on COMPFIRST is negative and significant (0.014; t ¼ 2.64), consistent with our expecta-
tion. According to the estimated coefficients, an increase in the number of comparable partners from the first quartile
(one) to the third quartile (six) is expected to result in an 8.6 percent decrease in audit fees for initial audit engagements.
In contrast, the expected reduction in audit fees for continuing engagements is only 2 percent.20
16
Note that we do not include an indicator variable for Big 4 in our regression model as it is absorbed by office fixed effects.
17
Our results are robust to various combinations of fixed effects, including (1) client firm and year; (2) audit firm, year, and industry; (3) industry and
year; and (4) partner, year, and industry fixed effects. Additionally, our results remain robust when the model includes other audit market attributes
such as the number of clients, the number of partners, and the ratio of clients to partners for each MSA or each MSA-industry.
18
The economic significance is calculated as exp(5 (0.004)) 1 ¼ 0.020. This can be seen as economically significant considering that it captures
the effect of within-office variation in internal competition. When we exclude office fixed effects, the interquartile change in COMP corresponds to a
6 percent reduction in audit fees.
19
We employ seemingly unrelated estimation (i.e., the “suest” command in Stata) to compare the coefficients between these two groups.
20
For initial audit engagements, an interquartile change in COMP is associated with a 0.086 (¼exp(5 (0.018)) 1) change in audit fees, where
0.018 is the sum of the coefficients on COMP and COMP FIRST. For continuing engagements, an interquartile change in COMP is associated
with a 0.020 (¼exp(5 (0.004)) 1) change in audit fees.

TABLE 3
The Effect of Internal Competition on Audit Fees
Dependent Variable 5 FEE FEE FEE NASFEE

Sample 5 Full Big 4 Non-Big 4 Full
(1) (2) (3) (4)
COMP 0.004 0.004 0.013 0.002
(22.41) (22.02) (22.38) (20.36)
SIZE 0.414 0.433 0.356 0.597
(73.63) (64.66) (34.20) (31.76)
LEV 0.041 0.121 0.103 0.009

(1.00) (2.41) (1.64) (0.07)
NBS 0.068 0.051 0.097 0.106
(4.82) (3.21) (3.62) (2.38)
NGS 0.137 0.140 0.096 0.184
(11.74) (9.74) (5.30) (4.54)
INVREC 0.435 0.669 0.135 0.014
(7.80) (8.05) (1.90) (0.08)
CURR 0.023 0.019 0.027 0.026
(12.31) (7.32) (10.49) (3.73)
ROA 0.228 0.342 0.116 0.288
(11.66) (11.23) (4.62) (4.26)
LOSS 0.096 0.086 0.103 0.019
(7.49) (5.24) (5.52) (0.42)
SGROW 0.011 0.010 0.009 0.028
(2.91) (1.95) (1.49) (1.81)
MTB 0.027 0.021 0.029 0.061
(4.39) (2.46) (3.64) (2.75)
FIRST 0.072 0.166 0.005 0.131
(3.74) (5.20) (0.23) (1.62)
OFFSIZE 0.157 0.141 0.179 0.073
(10.87) (7.18) (8.88) (1.30)
EXT_COMP 0.186 0.138 0.290 0.130
(3.66) (2.31) (3.40) (0.73)
OFF_ISA 0.023 0.034 0.071 0.043
(1.28) (1.82) (0.95) (0.72)
PTNR_ISA 0.262 0.258 0.150 0.228
(10.93) (10.41) (1.66) (3.13)
FEMALE 0.000 0.003 0.013 0.036
(0.00) (0.21) (0.54) (0.66)
Fixed effects Office, Year, Office, Year, Office, Year, Office, Year,
Industry Industry Industry Industry
Adjusted R2 0.911 0.820 0.870 0.492
Observations 15,425 10,357 5,068 15,425
, , Denote two-tailed statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively.
Columns (1), (2), and (3) of this table report the results of regressing audit fees on internal competition for the full sample, Big 4 clients, and non-
Big 4 clients, respectively. Column (4) reports the results of regressing nonaudit fees on internal competition. All t-statistics (in parentheses) are
based on the standard errors clustered by client firm.
Second, we explore how local audit market competition among audit offices (i.e., external competition) interacts
with internal competition. In more competitive local audit markets, it would be more difficult for audit partners to
attract new clients while facing a greater risk of client losses. Thus, intense external competition could strengthen the
effect of internal competition on audit fees. In our main analysis, we measure external competition (EXT_COMP) using

TABLE 4
The Effect of Internal Competition on Audit Fees: Change Analysis
Dependent Variable 5 CH_FEE

CH_COMP 0.002
(21.74)
CH_SIZE 0.229
(10.88)
CH_LEV 0.146
(3.99)
CH_NBS 0.025

(1.75)
CH_NGS 0.019
(1.09)
CH_INVREC 0.044
(0.72)
CH_CURR 0.010
(4.76)
CH_ROA 0.050
(2.44)
CH_LOSS 0.016
(2.49)
CH_SGROW 0.007
(1.51)
CH_MTB 0.009
(1.64)
CH_FIRST 0.135
(7.12)
CH_OFFSIZE 0.029
(0.68)
CH_EXT_COMP 0.029
(2.79)
CH_OFF_ISA 0.096
(6.90)
CH_PTNR_ISA 0.017
(1.69)
CH_FEMALE 0.010
(4.24)
Fixed effects Office, Year, Industry
Adjusted R2 0.167
Observations 11,359
This table reports the results of regressing changes in audit fees on changes in internal competition. We use the prefix CH_ to denote year-over-
year change variables. All t-statistics (in parentheses) are based on the standard errors clustered by client firm.
a Herfindahl-Hirschman Index (HHI) at the MSA-industry level (Newton, Wang, and Wilkins 2013; Gipper et al. 2021)
and multiply the value of HHI by 1 so that a higher value of EXT_COMP indicates greater external competition. In
this cross-sectional test, for easier interpretations, we define an indicator variable for greater external competition,
DEXT_COMP, which is equal to 1 if EXT_COMP is above the median and 0 otherwise.21 As shown in column (2) of
21
The inferences are not changed when we use a continuous measure for external competition (EXT_COMP).

TABLE 5
The Effect of Internal Competition on Audit Fees: Cross-Sectional Tests
Dependent Variable 5 FEE
(1) (2) (3)

Initial Audit Engagement External Competition Partner-Level Industry Expertise
COMP 0.004 0.001 0.005
(2.18) (0.21) (2.97)
COMP FIRST 0.014
(22.64)

FIRST 0.019
(0.85)
COMP DEXT_COMP 0.006
(22.71)
DEXT_COMP 0.024
(1.38)
COMP PTNR_ISA 0.018
(3.90)
PTNR_ISA 0.207
(7.23)
Control variables Included Included Included
Fixed effects Office, Year, Industry Office, Year, Industry Office, Year, Industry
Adjusted R2 0.911 0.911 0.911
Observations 15,425 15,425 15,425
This table reports the results of cross-sectional analyses. Columns (1), (2), and (3) present the effects of an initial audit engagement, external com-
petition, and partner-level industry expertise on the relation between internal competition and audit fees. In column (2), DEXT_COMP is an indi-
cator variable equal to 1 if EXT_COMP is above the median and 0 otherwise. All t-statistics (in parentheses) are based on the standard errors
clustered by audit partner.
Table 5, the coefficient on COMP DEXT_COMP is negative and significant, suggesting that the effect of internal
competition on audit fees is more pronounced when external competition is stronger.22
Third, we examine the effect of partner industry specialization on the relation between internal competition and
audit fees. Prior studies suggest that industry specialist audit partners can differentiate themselves from others by provid-
ing high-quality audit services and can thus charge fee premiums (Zerni 2012; Goodwin and Wu 2014; Aobdia et al.
2021). Therefore, it is plausible that industry specialist audit partners can attract new clients without resorting to fee dis-
counting. We include an interaction between COMP and PTNR_ISA, an indicator variable for a partner’s industry spe-
cialization. PTNR_ISA is equal to 1 if the audit partner has the largest market share in terms of the client’s audit fees in
the MSA-industry segment and 0 otherwise. As reported in column (3), the coefficient on COMP PTNR_ISA is posi-
tive and significant, suggesting that the negative effect of internal competition on audit fees is weaker for industry spe-
cialist audit partners. Overall, the cross-sectional results in Table 5 are consistent with the argument that internal
competition affects individual partners’ audit pricing decisions in a manner consistent with the predictions of economic
theory.
Similar Attributes with Peers

Social comparison theory in psychology suggests individuals have an innate desire to compare themselves with
others and strive to outperform them, which may induce competitive behavior. The theory further suggests that social
22
Following Numan and Willekens (2012), we alternatively define a variable for external competition based on the difference in the audit office’s mar-
ket share from that of the closest competing audit office, multiplied by 1 (OFF_DIFFC). The market share is calculated based on audit fees within
the office-industry segment. The interaction between COMP and OFF_DIFFC is significantly negative (0.970; t ¼ 1.97, untabulated), suggesting
that the effect of internal competition on audit fees is stronger when external competition is high.

comparison becomes more pronounced when the comparison groups share similar attributes, such as age and sex
(Festinger 1954; Tafkov 2013). The presence of competitors with similar personal attributes also strengthens internal
competition from the economic perspective because the competitors can substitute for each other. Accordingly, we
expect audit partners to react more strongly to competitive pressure arising from other partners with similar personal
attributes, such as those of the same sex or those with a similar length of experience.
We identify the sex of audit partners by using their LinkedIn profile pictures. If these are missing, we infer their sex
based on their first names using gender-api.com. We then define SAMEGEN as the number of comparable peers who
share the same sex as the partner, divided by the total number of comparable peers. We measure a partner’s length of
work experience as the number of years since the partner earned a bachelor’s or master’s degree, using the information
on their LinkedIn profiles.23 We then define SIMEXP as the number of comparable peers with similar working experi-
ence divided by the total number of comparable peers. We classify a peer as having similar working experience to a given
partner if the difference in their length of working experience is within six years, which is the median difference in our

sample.24
We augment Equation (1) with an interaction between internal competition (COMP) and either SAMEGEN or
SIMEXP. In column (1) of Table 6, the coefficient on COMP SAMEGEN is negative and significant, suggesting that
the association between internal competition and fee discounting is stronger when the proportion of partners of the
same sex is higher.25 In economic terms, when the proportion of same-sex partners is high (at the third quartile), an
interquartile change in the number of comparable peers results in a 3.4 percent decrease in audit fees. When the propor-
tion of same-sex partners is low (at the first quartile), the expected reduction in audit fees is 1.2 percent for the same
change in the number of comparable peers.26 The negative coefficient on COMP SIMEXP in column (2) suggests
that audit partners face greater internal competition when there are more comparable peers with similar lengths of work-
ing experience. Overall, the results in Table 6 support the notion that the relation between internal competition and
audit fees is stronger when peers share similar personal attributes.27
Internal Competition and Audit Quality

In this section, we examine whether internal competition affects audit quality. On the one hand, internal competi-
tion can be inversely associated with audit quality. First, given the negative relation between internal competition and
audit fees, audit partners may respond to internal competition by reducing audit efforts to maintain or improve the prof-
itability of engagements. They may focus on attracting new clients to increase their contribution to the audit firm (i.e.,
revenue) rather than on performing high-quality audits because the former is more directly observable than the latter in
the short term (Dekeyser et al. 2021). Second, audit partners who face greater internal competition may be more lenient
in audits to cater to clients’ management. Previous studies suggest that auditors are more likely to be dismissed when
they disagree with clients (DeFond and Subramanyam 1998; Newton et al. 2013). Clients dissatisfied with their incum-
bent audit partners may request that the audit partner be replaced (Chen, Peng, Xue, Yang, and Ye 2016). Cowle and
Rowe (2022) provide evidence that auditors who issue adverse internal control opinions experience declines in client
base and fee growth. Third, the competitive culture may discourage audit partners from sharing knowledge and opin-
ions, thus hindering cooperation among them (Luft 2016).
On the other hand, internal competition might not be significantly associated with audit quality. First, various
mechanisms, such as quality control systems, are in place that help maintain audit quality. Second, poor audit quality
can lead to significant reputational and litigation damage for individual partners (Knechel et al. 2013; Coram and
Robinson 2017; KPMG 2018), which can incentivize audit partners to maintain audit quality. Third, monetary incen-
tives may motivate audit partners to deliver high-quality audits because audit quality is an important performance eval-
uation metric (Knechel et al. 2013; Lennox et al. 2020). For example, Bik, Bouwens, Knechel, and Zou (2021) show that
Dutch audit firms withhold a portion of partners’ compensation in case of subsequent audit failures.
23
For audit partners who obtained their master’s degrees three (or more) years after their bachelor’s degrees, we assume that they started working
upon completion of their bachelor’s.
24
For the analyses in Table 6, we exclude the sample of audit partners where there is no peer (COMP ¼ 0) because SAMEGEN and SIMEXP cannot
be defined for them. For the analysis of SIMEXP, we further exclude the sample of audit partners who do not have valid LinkedIn profiles, which
reduces sample size to 8,720 firm-years.
25
In additional tests, we find that the association between internal competition and fee discounts is stronger for male than for female auditors
(untabulated).
26
When SAMEGEN is at its Q3 (1.000), an interquartile change in COMP is associated with a 0.034 (¼exp(5 (0.002 + (0.009) (1.000))) 1)
change in audit fees. When SAMEGEN is at its Q1 (0.500), an interquartile change in COMP is associated with a 0.012 (¼exp(5 (0.002 +
(0.009) (0.500))) 1) change in audit fees.
27
It is unclear whether this fee discounting due to social comparison with similar others, which is related to a psychological factor, can be considered
efficient (i.e., rational from an economic perspective) or not.

TABLE 6
The Effect of Internal Competition on Audit Fees: Similar Attributes with Peers
Dependent Variable 5 FEE
(1) (2)
Partners with Partners with Similar
Same Sex Length of Experience
COMP 0.002 0.001
(0.76) (0.20)
COMP SAMEGEN 0.009

(22.46)
SAMEGEN 0.083
(2.97)
COMP SIMEXP 0.007
(21.74)
SIMEXP 0.005
(0.19)
Control variables Included Included
Fixed effects Office, Year, Industry Office, Year, Industry
Adjusted R2 0.902 0.902
Observations 12,367 8,720
This table reports the results of cross-sectional analyses. Columns (1) and (2) present the effects of the proportion of comparable partners who
share the same sex and those with similar lengths of work experience on the relation between internal competition and audit fees, respectively. All
t-statistics (in parentheses) are based on the standard errors clustered by client firm.
To examine the association between internal competition among audit partners and audit quality, we employ three
audit quality proxies: (1) financial statement restatement (RES), (2) meeting earnings benchmarks (MEET), and (3) rec-
ognition of goodwill impairment (IMPAIR). For the first two proxies, we estimate the following logistic regression
model:
P
RES ðMEETÞ ¼ b0 þ b1 COMP þ bi Controls þ office; year; and industry fixed effects þ e, (2)
where RES is an indicator variable equal to 1 if the client’s annual financial statements are subsequently restated with a
negative net effect (i.e., a decrease in income) and 0 otherwise (Newton et al. 2013).28 Previous research indicates that
financial statement restatements are the most reliable and widely available measure of audit quality (DeFond and
Zhang 2014; Aobdia 2019). MEET is an indicator variable equal to 1 if the client’s actual earnings per share (EPS)
exceed the median of the analysts’ latest EPS forecasts within a one-cent range. If internal competition is negatively asso-
ciated with audit quality, we expect a positive coefficient on COMP in Equation (2).
To examine the relation between internal competition and audit quality using the recognition of goodwill impair-
ment, we estimate the interaction model adopted from Lobo, Paugam, Zhang, and Casta (2017) and Carcello, Neal,
Reid, and Shipman (2020) as follows:
IMPAIR ¼ b0 þ b1 COMP þ b2 HIGH IMP RISK þ b3 COMP HIGH IMP RISK

X
þ bi Controls þ office; year; and industry fixed effects þ e, (3)
IMPAIR is the ratio of the amount of goodwill impairment to pre-impairment goodwill. HIGH_IMP_RISK is an indi-
cator variable equal to 1 if the client has a significant amount of pre-impairment goodwill (i.e., goodwill accounts for
28
For the restatement analysis, the sample size is reduced to 12,134. Since it typically takes about two to three years for financial statement misstate-
ments to be detected and announced, we use observations until December 2020. The results remain similar when we include restatements with both
the positive and negative net effects (untabulated).

more than 0.5 percent of total sales in the last two years) and the market indicates that asset impairment is likely neces-
sary (i.e., market-to-book ratio lower than one for the last two years) and 0 otherwise (Beatty and Weber 2006;
Ramanna and Watts 2012; Carcello et al. 2020).29 If internal competition is negatively associated with audit quality,
auditors are less likely to require managers to recognize goodwill impairment when warranted. In this case, we expect a
negative coefficient on COMP HIGH_IMP_RISK in Equation (3).
Table 7, Panel A presents the regression results for the RES measure. Column (1) shows that the coefficient on
COMP is not significant for the full sample, suggesting that internal competition is not significantly associated with the
likelihood of financial statement restatements. However, when we repeat the analysis separately for Big 4 and non-Big 4
subsamples, as reported in columns (2) and (3), we find a positive relation between internal competition and restatements
for non-Big 4 clients. Panel B presents the results where the dependent variable is MEET. Column (1) shows that the
coefficient on COMP is not significant for the full sample. However, when the sample is partitioned into Big 4 and non-
Big 4 subsamples, the coefficient on COMP is positive and significant for non-Big 4 clients in column (3) but not signifi-

cant for Big 4 clients in column (2).30,31 Panel C presents the results for goodwill impairment recognition. Similar to the
previous results using RES and MEET, the coefficient on COMP HIGH_IMP_RISK is not statistically significant for
the full sample, as reported in column (1). We further show that the coefficient is negative and statistically significant
only for the non-Big 4 subsample, as shown in columns (2) and (3).32
Overall, we provide evidence consistent with the notion that internal competition is inversely related to audit quality
only for non-Big 4 auditors. These nuanced effects of internal competition on audit quality may be due to more effective
quality control systems in Big 4 firms (Che, Hope, and Langli 2020; Pittman et al. 2023).33
Additional Tests
Client Retention and Attraction
Our main findings are consistent with the idea that audit partners facing greater internal competition charge lower
audit fees to retain existing clients and attract new ones. Although retaining and attracting clients results from collective
efforts at the office or firm level, engagement partners play an incremental role. For example, Pittman, Qi, Zhang, and
Zhao (2021) report that partners with larger social networks are more likely to attract new clients. In this section, we
explore whether internal competition is indeed associated with a greater likelihood of client retention and attraction
using the following logistic regression model at the partner-year level34:
P
CL GAIN ðCL LOSS, CL NETGAINÞ ¼ b0 þ b1 COMP þ bi Controls þ office and year fixed effects þ e, (4)
where CL_GAIN is an indicator variable equal to 1 if the audit partner attracts at least one new client from other audit
firms and 0 otherwise. CL_LOSS is an indicator variable equal to 1 if the audit partner loses at least one existing client
to another audit firm and 0 otherwise. CL_NETGAIN is an indicator variable equal to 1 if the audit partner attracts at
least one new client without losing any existing clients and 0 otherwise.35 We collapse client firm-partner-year observa-
tions into partner-year ones by averaging each client-firm control variable across client firm-year observations. These
variables are prefixed by PMean_.
Table 8 presents the regression results for estimating Equation (4). First, we use CL_GAIN as the dependent vari-
able in column (1). The positive and significant coefficient on COMP suggests that audit partners facing greater internal
29
For control variables, we additionally include an indicator variable for restatement in the previous year (LAG_RES) in the RES regression, the natu-
ral logarithm of the number of analysts (NO_ANAL) in the MEET regression, and the standard deviation of stock returns (STD_RET) and an indi-
cator variable capturing whether there have been acquisitions that increase goodwill in the last two years (ACQUIRE) in the IMPAIR regression.
30
The Chi-square statistic that tests the difference in the coefficients on COMP between the Big 4 and non-Big 4 subsamples in the RES (MEET)
regression is 5.48 (3.10), which is significant at the 5 percent (10 percent) level. Similarly, the Chi-square statistic testing the difference in the coeffi-
cients on COMP HIGH_IMP_RISK between the two groups in the IMPAIR regression is 4.29, which is significant at the 5 percent level.
31
Logistic regressions with multiple fixed effects generate a significant number of singletons, which are dropped in the estimation. For example, for
the results in column (1) of Panels A and B, the numbers of observations used are 8,048 (out of 12,134) and 7,891 (out of 11,976), respectively. In an
untabulated analysis, we estimate the regressions using a linear probability model and find similar results.
32
Our results are robust to estimating a tobit regression model. Our results also remain similar when we use an indicator variable for the recognition
of goodwill impairment.
33
We acknowledge that the audit quality findings could be due to the fact that internal competition can prompt partners to accept riskier or lower-
quality clients. Thus, we caution readers to interpret the results carefully.
34
This regression model uses observations at the partner-year level as a unit of analysis. Since some audit partners work on engagements in multiple
industries, the model does not include industry fixed effects.
35
In measuring CL_GAIN, CL_LOSS, and CL_NETGAIN, we consider only cases in which new clients were brought in from outside the audit firm
and existing clients were lost to other audit firms. When we include these cases, the coefficients on COMP are 0.172 (t ¼ 13.44), 0.046 (t ¼ 4.75),
and 0.154 (t ¼ 10.18) for the CL_GAIN, CL_LOSS, or CL_NETGAIN analyses, respectively (untabulated).

TABLE 7
The Effect of Internal Competition on Audit Quality
Panel A: Financial Statement Restatement

Dependent Variable 5 RES
Sample 5 Full Big 4 Non-Big 4

(1) (2) (3)
COMP 0.013 0.001 0.187
(0.64) (20.03) (2.56)
SIZE 0.007 0.043 0.182

(0.16) (0.76) (2.27)
LEV 0.362 0.402 0.229
(1.07) (0.87) (0.40)
NBS 0.117 0.194 0.034
(1.12) (1.52) (0.16)
NGS 0.022 0.119 0.151
(0.21) (0.85) (0.90)
INVREC 0.026 0.001 0.929
(0.06) (0.00) (1.46)
CURR 0.025 0.069 0.008
(0.88) (1.37) (0.21)
ROA 0.399 1.111 0.032
(1.72) (3.12) (0.11)
LOSS 0.025 0.043 0.100
(0.16) (0.21) (0.42)
SGROW 0.055 0.150 0.171
(0.94) (1.48) (1.94)
MTB 0.069 0.032 0.051
(1.16) (0.42) (0.49)
FIRST 0.191 0.634 0.110
(0.74) (1.47) (0.37)
OFFSIZE 0.295 0.032 0.263
(1.02) (0.08) (0.67)
EXT_COMP 0.462 0.731 0.249
(0.96) (1.12) (0.27)
OFF_ISA 0.026 0.132 0.221
(0.14) (0.63) (0.34)
PTNR_ISA 0.008 0.045 0.359
(0.04) (0.20) (0.46)
FEMALE 0.029 0.067 0.117
(0.18) (0.37) (0.32)
LAG_RES 2.901 2.950 2.535
(21.54) (18.10) (9.84)
Pseudo R2 0.298 0.316 0.255
Observations 12,134 8,172 3,962
(continued on next page)
competition are more likely to attract new clients. Second, we employ CL_LOSS as the dependent variable and find a
positive but insignificant coefficient on COMP. This finding suggests that the likelihood of client loss is not significantly
associated with internal competition. Finally, we examine the combined effects of client gain and loss using

TABLE 7 (continued)
Panel B: Meeting Earnings Benchmarks
Dependent Variable 5 MEET

(1) (2) (3)
COMP 0.009 0.005 0.249
(0.42) (0.22) (1.82)
SIZE 0.234 0.305 0.166
(3.03) (3.48) (0.84)
LEV 0.568 0.356 0.859

(1.32) (0.71) (0.80)
NBS 0.103 0.120 0.049
(0.68) (0.73) (0.12)
NGS 0.081 0.185 0.300
(0.71) (1.34) (1.13)
INVREC 1.259 1.097 2.010
(1.95) (1.47) (1.34)
CURR 0.046 0.084 0.022
(1.48) (1.78) (0.57)
ROA 0.117 0.446 0.788
(0.40) (1.07) (1.62)
LOSS 0.524 0.803 0.102
(2.70) (3.23) (0.27)
SGROW 0.052 0.028 0.128
(0.61) (0.29) (0.61)
MTB 0.090 0.014 0.417
(1.33) (0.17) (2.72)
FIRST 0.053 0.285 0.083
(0.18) (0.78) (0.15)
OFFSIZE 1.031 1.034 0.945
(3.16) (2.70) (1.21)
EXT_COMP 0.656 0.861 1.882
(1.27) (1.52) (1.00)
OFF_ISA 0.439 0.429 0.226
(2.16) (2.05) (0.25)
PTNR_ISA 0.232 0.235 1.149
(0.97) (0.95) (1.05)
FEMALE 0.275 0.382 0.111
(1.42) (1.82) (0.20)
NO_ANAL 0.323 0.458 0.117
(2.79) (3.19) (0.47)
Pseudo R2 0.129 0.114 0.190
Observations 11,976 9,370 2,606
CL_NETGAIN as the dependent variable. As reported in column (3), the coefficient on COMP is positive and signifi-
cant. This result implies that audit partners under greater internal competition are more likely to attract new clients.36
36
We acknowledge that we are unable to draw any definitive conclusions regarding long-term equilibrium because our empirical results do not neces-
sarily imply a continuation of this trend over the long run. Notably, prior literature has documented that audit offices and partners gaining new
engagements often face resource limitations, which can potentially lead to lower audit quality and client dissatisfaction (Bills, Swanquist, and
Whited 2016; Suzuki and Takada 2023; Wertheim 2023). This, in turn, could result in client attrition in the subsequent period, moving toward an
equilibrium point. Accordingly, we caution readers against drawing conclusions about long-term implications from the results.

TABLE 7 (continued)
Panel C: Goodwill Impairment Recognition
Dependent Variable 5 IMPAIR

(1) (2) (3)
COMP 0.001 0.000 0.003
(1.12) (0.75) (1.20)
HIGH_IMP_RISK 0.010 0.015 0.021
(0.81) (0.80) (1.27)
COMP HIGH_IMP_RISK 0.001 0.001 0.009
(0.22) (0.38) (22.40)

SIZE 0.004 0.006 0.002
(3.80) (4.85) (0.79)
LEV 0.016 0.025 0.027
(1.76) (2.56) (1.38)
NBS 0.007 0.006 0.013
(2.59) (2.05) (1.59)
NGS 0.002 0.002 0.004
(0.90) (0.64) (0.64)
INVREC 0.072 0.097 0.037
(5.28) (5.70) (1.55)
CURR 0.001 0.000 0.002
(0.96) (0.12) (2.05)
ROA 0.019 0.012 0.026
(2.33) (0.95) (2.50)
LOSS 0.065 0.068 0.059
(14.43) (11.92) (7.39)
SGROW 0.003 0.004 0.002
(2.32) (2.86) (0.53)
MTB 0.016 0.014 0.022
(9.11) (7.53) (5.15)
FIRST 0.015 0.014 0.015
(1.96) (1.33) (1.32)
OFFSIZE 0.001 0.013 0.018
(0.10) (1.69) (2.01)
EXT_COMP 0.013 0.022 0.028
(1.20) (2.01) (0.90)
OFF_ISA 0.008 0.008 0.002
(2.06) (2.20) (0.05)
PTNR_ISA 0.010 0.009 0.014
(2.12) (1.92) (0.42)
FEMALE 0.003 0.003 0.009
(0.94) (0.72) (0.98)
STD_RET 0.090 0.149 0.036
(3.52) (3.60) (1.15)
ACQUIRE 0.001 0.001 0.000
(0.34) (0.22) (0.05)
Adjusted R2 0.095 0.116 0.059
Observations 13,241 9,435 3,806
This table reports the results of regressing audit quality on internal competition. Panel A shows the effect of internal competition on restatement, Panel B
shows the effect on earnings benchmarks, and Panel C shows the effect on goodwill impairment recognition. The logistic (OLS) models are used for
Panels A and B (Panel C). In Panels A and B (Panel C), z-statistics (t-statistics) are reported in parentheses. Standard errors are clustered by client firm.

TABLE 8
The Effect of Internal Competition on Client Retention and Attraction
Dependent Variable 5 (1) (2) (3)

CL_GAIN CL_LOSS CL_NETGAIN
COMP 0.148 0.040 0.132
(8.20) (1.57) (7.57)
PMean_SIZE 0.155 0.162 0.150
(4.23) (2.45) (4.11)
PMean_LEV 0.456 0.358 0.348
(1.43) (0.70) (1.10)

PMean_NBS 0.061 0.070 0.000
(0.65) (0.43) (0.00)
PMean_NGS 0.102 0.019 0.127
(1.22) (0.15) (1.56)
PMean_INVREC 0.678 1.201 0.515
(2.11) (2.51) (1.65)
PMean_CURR 0.008 0.013 0.001
(0.46) (0.53) (0.05)
PMean_ROA 0.040 0.021 0.201
(0.25) (0.10) (1.25)
PMean_LOSS 0.335 0.067 0.390
(2.74) (0.33) (3.19)
PMean_SGROW 0.025 0.080 0.016
(0.59) (1.31) (0.37)
PMean_MTB 0.071 0.047 0.070
(1.49) (0.70) (1.47)
PMean_FIRST 5.180 0.011 4.533
(10.35) (0.03) (11.05)
PMean_OFFSIZE 0.444 0.055 0.480
(1.10) (0.08) (1.18)
PMean_EXT_COMP 0.273 0.157 0.311
(1.67) (0.56) (1.91)
PMean_OFF_ISA 0.681 0.593 0.646
(3.35) (1.52) (3.11)
PMean_PTNR_ISA 0.244 0.060 0.259
(1.97) (0.33) (2.08)
PMean_FEMALE 0.148 0.040 0.132
(8.20) (1.57) (7.57)
Fixed effects Office, Year Office, Year Office, Year
Pseudo R2 0.280 0.221 0.224
Observations 7,832 7,832 7,832
This table presents the results of regressing client gain or loss on internal competition. We collapse client firm-partner-year observations into
partner-year ones by averaging each client-firm control variable across client-year observations (prefixed by PMean_). All z-statistics (in parenthe-
ses) are based on robust standard errors.
Other Additional Tests

We perform several additional tests (untabulated). First, we measure external peer pressure by defining competitors
as partners from different audit firms within the local market who work on engagements in overlapping industries. We
find that this measure of external peer pressure is not significantly associated with audit fees, suggesting that external
peer pressure does not have an incremental effect over local audit market competition. More importantly, when we

include both internal and external peer pressure in the model, the coefficient on COMP remains significantly negative,
whereas the coefficient on the external pressure variable remains insignificant.
Second, we limit our sample to partners working on engagements in a single industry. One may argue that our
results are primarily driven by partners who work on engagements in multiple industries (and may lack industry exper-
tise) and charge lower audit fees to their clients. Our results are robust to this restricted sample. To further address the
concern that COMP is inflated for partners covering multiple industries, we alternatively define COMP for partners cov-
ering multiple industries as the highest number of comparable peers among industries. The results remain unchanged.
Third, we use alternative measures of internal competition. Specifically, we modify COMP by (1) using the alterna-
tive industry definition based on the Fama-French 12-industry classification instead of SIC codes (Newton, Persellin,
Wang, and Wilkins 2016); (2) identifying local audit offices based on cities (instead of MSA); and (3) using the logged
value of COMP. Our findings are robust to these alternative measures.
Fourth, we alternatively measure partner-level industry expertise at the national level following Aobdia et al.

(2021). Specifically, we define expertise as the total audit fees charged by the partner in the client’s industry (based on
one-digit SIC codes) divided by the total audit fees for the client’s industry. We repeat the analysis after replacing
PTNR_ISA with this expertise measure and find similar results. Our results are also robust when we use the Fama and
French 48 industry classifications in defining industry expertise.
Fifth, to address concerns that a larger number of comparable peers in a specific industry might be associated with
economies of scale or office-level industry expertise, we include (1) the number of clients the office serves in the industry
or (2) the percentile rank of the number of clients in each office-industry group (Fung, Gul, and Krishnan 2012) as an
additional control variable. Our results remain robust after including these variables.
Finally, we re-estimate our analysis after removing audit partners with more than ten (or five) clients. Our main
results remain significant, indicating that our findings are not driven by a few audit partners with a large client pool.
V. CONCLUSIONS
This study examines whether internal competition within an audit office affects engagement partners’ audit pricing
decisions. By using the number of comparable peers for each partner as an empirical proxy for internal competition, we
find that audit partners charge lower audit fees when they face greater internal competition, particularly for those of
non-Big 4 firms. This finding is consistent with the argument that internal competition incentivizes audit partners to
offer fee discounts. We also find that the relation between internal competition and audit fees is more pronounced for
initial audit engagements, in highly competitive local audit markets, and when peers share similar personal attributes,
such as sex and experience. In addition, the effect of internal competition on audit fees is weaker for industry specialist
audit partners. Our analysis further suggests that greater internal competition is associated with lower audit quality for
non-Big 4 clients.
This study has some limitations. First, we acknowledge that internal competition is not directly observable, and
therefore our measures may be subject to measurement errors. Second, our analysis is limited to audit partners of public
clients, whereas many audit clients are private firms (Lennox and Wu 2018). Third, our sample is restricted to U.S. firm-
year observations after the adoption of PCAOB Rule 3211, and our sample period is relatively short.
Notwithstanding these limitations, we make significant contributions to the literature. To our knowledge, this is the
first study to examine the effect of within-office internal competition on audit outcomes. Thus, the results of this study
enhance our understanding of individual audit partner behavior. Moreover, our findings should be of interest to various
stakeholders, including regulators and the executive committees of audit firms.
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APPENDIX A
Variable Definitions
Variables Definitions
Dependent variable
FEE ¼ The natural logarithm of audit fees in U.S. dollars.
Independent variable
COMP ¼ The number of comparable peers in the same office, in which the comparable peers are partners who
work on engagements in overlapping industries with the given partner. One-digit SIC codes are used
for industry classification.
Control variables
SIZE ¼ The natural logarithm of total assets in millions of U.S. dollars.

LEV ¼ Long-term debt divided by total assets.
NBS ¼ The natural logarithm of 1 plus the number of business segments.
NGS ¼ The natural logarithm of 1 plus the number of geographic segments.
INVREC ¼ The sum of accounts receivable and inventories, divided by total assets.
CURR ¼ The ratio of current assets to current liabilities.
ROA ¼ Income before extraordinary items divided by lagged total assets.
LOSS ¼ An indicator variable equal to 1 if the client reports a net loss, and 0 otherwise.
SGROW ¼ Change in sales, divided by the sales of the previous year.
MTB ¼ The natural logarithm of the ratio of the market value to the book value of equity.
FIRST ¼ An indicator variable equal to 1 for the first-year audit engagement, and 0 otherwise.
OFFSIZE ¼ The natural logarithm of the sum of audit fees of the audit office.
EXT_COMP ¼ The measure of external audit market competition, calculated as the Herfindahl-Hirschman Index (HHI)
multiplied by 1, where HHI is the sum of the squared market shares (in audit fees) of each audit
office in an MSA-industry audit market. One-digit SIC codes are used for industry classification.
OFF_ISA ¼ An indicator variable equal to 1 if the audit office is an industry specialist, and 0 otherwise. An audit
office with the largest audit market share in terms of client audit fees in the MSA-industry audit
market is classified as an industry specialist. One-digit SIC codes are used for industry classification.
PTNR_ISA ¼ An indicator variable equal to 1 if the audit partner is an industry specialist, and 0 otherwise. An audit
partner with the largest audit market share in terms of client audit fees in the MSA-industry audit
market is classified as an industry specialist. One-digit SIC codes are used for industry classification.
FEMALE ¼ An indicator variable equal to 1 if the audit partner is female, and 0 otherwise.
Other variables
NASFEE ¼ The natural logarithm of non-audit fees in U.S. dollars.
DEXT_COMP ¼ An indicator variable equal to 1 if EXT_COMP is above the sample median, and 0 otherwise.
SAMEGEN ¼ The ratio of comparable peers of the same sex in the same office, in which the comparable peers are
partners who work on engagements in overlapping industries with the given partner.
SIMEXP ¼ The ratio of comparable peers with similar working experience in the same office, in which the
comparable peers are partners who work on engagements in overlapping industries with the given
partner. We consider similar experience as the difference in the length of working experience between
the two partners is within six years, which is the median length of working experience (i.e., the
number of years since they earned a bachelor’s or master’s degree, if any).
RES ¼ An indicator variable equal to 1 if the client’s annual financial statements are subsequently restated with
a negative net effect (i.e., a decrease in income), and 0 otherwise.
LAG_RES ¼ RES in the previous year.
MEET ¼ An indicator variable equal to 1 if the actual EPS is higher than the median of the analysts’ latest EPS
forecasts within a one-cent range, and 0 otherwise.
NO_ANAL ¼ The natural logarithm of the number of analysts following the firm.
IMPAIR ¼ The ratio of the amount of goodwill impairment to pre-impairment goodwill.
HIGH_IMP_RISK ¼ An indicator variable equal to 1 if the client has a significant amount of pre-impairment goodwill
(i.e., goodwill accounts for more than 0.5 percent of total sales in the last two years) and the market
indicates that asset impairment is likely necessary (i.e., market to book ratio lower than one for the
last two years), and 0 otherwise.

APPENDIX A (continued)
Variables Definitions
STD_RET ¼ The standard deviation of stock returns over the 12 months.
ACQUIRE ¼ An indicator variable equal to 1 if there have been acquisitions that increase goodwill in the last two
years, and 0 otherwise.
CL_GAIN ¼ An indicator variable equal to 1 if the audit partner attracts at least one new client from other audit
firms, and 0 otherwise. Partners without data from the previous year are excluded from the analysis.
CL_LOSS ¼ An indicator variable equal to 1 if the audit partner loses at least one existing client to other audit firms,
and 0 otherwise. Partners without data from the previous year are excluded from the analysis.
CL_NETGAIN ¼ An indicator variable equal to 1 if the audit partner attracts at least one new client without losing
existing clients, and 0 otherwise. Partners without data from the previous year are excluded from the
analysis.


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AUDITING: A JOURNAL OF PRACTICE & THEORY American Accounting Association

Vol. XX, No. XX DOI: 10.2308/AJPT-2021-176

Does Internal Competition among Audit Partners Affect

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Submitted: December 2021

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Auditing: A Journal of Practice & Theory

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II. BACKGROUND AND HYPOTHESIS DEVELOPMENT

Individual Audit Partners

Auditing: A Journal of Practice & Theory

Internal Competition among Audit Partners

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Internal Competition and Audit Fees

Auditing: A Journal of Practice & Theory

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Measure of Internal Competition

Auditing: A Journal of Practice & Theory

Sample Selection Procedures n

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FEE ¼ b0 þ b1 COMP þ b2 SIZE þ b3 LEV þ b4 NBS þ b5 NGS þ b6 INVREC

Auditing: A Journal of Practice & Theory

Panel A: Sample by Audit Firms

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Total 2,953 11.731 8 4.570 3

Panel B: Descriptive Statistics

IV. EMPIRICAL RESULTS

Auditing: A Journal of Practice & Theory

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Auditing: A Journal of Practice & Theory

Dependent Variable 5 FEE FEE FEE NASFEE

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Auditing: A Journal of Practice & Theory

Dependent Variable 5 CH_FEE

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Auditing: A Journal of Practice & Theory

Dependent Variable 5 FEE

(1) (2) (3)

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Similar Attributes with Peers

Auditing: A Journal of Practice & Theory

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Internal Competition and Audit Quality

Auditing: A Journal of Practice & Theory

Dependent Variable 5 FEE

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IMPAIR ¼ b0 þ b1 COMP þ b2 HIGH IMP RISK þ b3 COMP HIGH IMP RISK

Auditing: A Journal of Practice & Theory

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Auditing: A Journal of Practice & Theory

Panel A: Financial Statement Restatement

Sample 5 Full Big 4 Non-Big 4

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Auditing: A Journal of Practice & Theory

Sample 5 Full Big 4 Non-Big 4

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Auditing: A Journal of Practice & Theory

Sample 5 Full Big 4 Non-Big 4

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Auditing: A Journal of Practice & Theory

Dependent Variable 5 (1) (2) (3)

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Other Additional Tests