Initial Evidence on the Association Between Audit Fees and Client Participation in Underfunded Multiemployer Pension Plans

In this study, we examine the association between audit fees and client participation in underfunded multiemployer pension plans. Consistent with our hypothesis, our regression results find that audit fees for firms with underfunded balances in multiemployer pension plans (MEPPs) are consistently higher and statistically significant compared with firms without MEPPs after controlling for other factors known to influence audit fees. The fee premium for firms with a net underfunded plan balance is 6.2%. Thus, the magnitude of the economic effect appears to be an average increase in audit fees of about $280,240. Furthermore, we find a significant inverse relationship between audit fees and estimated MEPP underfunding when firms with higher unionization levels. Our findings are likely to be of interest to standards-setters, regulators, and policymakers in the United States, European Union, and other countries as appropriate.