Relationship between key audit matters reporting and audit fees: moderating role of audit firm quality and client complexity

Abstract

This study investigates the relationship between the number of key audit matters (NKAMs) and audit fees (AFEE), and the moderating roles of audit firm quality (proxied by the Big4 auditors) and client complexity (proxied by client size and revenue) in this relationship. The study uses 1,163 listed non-financial firm-year observations in Germany from 2018 to 2023. I employ ordinary least squares regression to test the hypotheses and use entropy balancing and propensity score matching to address endogeneity concerns. The regression results show a significant positive association between NKAMs and AFEE, which is stronger for Big4 clients and complex (large-size and high-revenue) clients. The results are robust across alternative models, variables and sample specifications. This study contributes to the audit quality literature regarding KAM reporting, audit fees, audit firm quality and client complexity. These findings have implications for various financial statement users. To the best of the author’s knowledge, this study is the first empirical investigation to examine the relationship between NKAMs and AFEE in Germany. Moreover, no prior study has examined the moderating role of Big4 auditors and client complexity in this relationship.