Journal of International Accounting, Auditing and Taxation 21 (2012) 156–168 Contents lists available at SciVerse ScienceDirect Journal of International Accounting, Auditing and Taxation Size effects and audit pricing: Evidence from Germany Rouven Fleischer ∗ , Max Goettsche Catholic University of Eichstaett-Ingolstadt, Ingolstadt School of Management, Auf der Schanz 49, 85049 Ingolstadt, Germany a b s t r a c t Previous research into audit pricing has focused on the US and Australasian markets. This study aims to elaborate on the role played by various size effects on audit pricing using data from the German market. As previous research has shown, audit firms that provide additional non-audit services are able to charge higher fees for auditing. By contrast, our results show that only Big 4 auditors can earn an audit fee premium by providing non-audit services. Our findings also show that the Big 4 premium shown by previous German research is strongly affected by the premium for overall market leadership. Furthermore, we find that the influence of risk variables such as leverage or past losses is significant only for small auditees, while for large auditees size is the determining factor. Finally, this study proposes that using the logarithm of the number of employees is a better proxy for company size than is the more commonly used logarithm of total assets because it is more constant over time and does not bear the risk of interdependencies with other financial statement-based variables. Therefore, its further use in audit pricing research is strongly recommended. © 2012 Elsevier Inc. All rights reserved. 1. Introduction Prior research has analyzed size effects on audit pricing in Germany and other countries (Bigus & Zimmermann, 2009, Köhler, Marten, Ratzinger, & Wagner 2010). We extend the literature by analyzing a Big 4 audit fee premium and a premium for providing non-audit services (NAS). We focus on the influences of auditor and auditee size as well as the interaction of a premium for overall market leadership with the Big 4 premium. We go beyond previous research by separately analyzing a premium for NAS for (non-)Big 4 auditors and prove that a NAS premium is not a general result but rather occurs for Big 4 auditors only. Previous research has shown that auditee size, usually measured as the logarithm of total assets or the logarithm of total sales, is the main determinant of audit pricing. However, this result has generally not been controlled for robustness by using different size variables. In contrast to previous studies, we use a size proxy that is not based on financial statement data, namely the logarithm of the total number of employees. Furthermore, we use the logarithm of total assets and that of total sales to control for robustness. We show that using the logarithm of the total number of employees as a size proxy is a better alternative to the company size proxies thus far used in audit research. The advantage of using this size proxy is avoiding possible interdependencies on other variables based on balance sheet or P&L data (i.e. problems of multicollinearity). In addition, owing to the worldwide use of political labor market instruments and legal protection against dismissal, this variable is expected to be less sensitive to economic developments such as economic downturns. In the present study, we focus on size effects of audit pricing. We investigate the general Big 4 premium in Germany and examine whether an audit fee premium for auditors that provide NAS to their clients is a general phenomenon or whether it results from auditor characteristics (i.e. being a Big 4 auditor). For NAS in particular, the results are likely to differ for Germany compared with other international settings because the German legal framework is less concrete and allows ∗ Corresponding author. E-mail address: rouven.fleischer@ku-eichstaett.de (R. Fleischer). 1061-9518/$ – see front matter © 2012 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.intaccaudtax.2012.07.005