The determinants of external audit costs in the New Zealand life insurance industry

The contracting theory literature suggests that auditors' pricing decisions reflect the efficacy of contracting arrangements in firms. Drawing a framework from this literature, we test empirically the simultaneous effect of six firm-specific variables on external audit costs using 1988-1993 data drawn from New Zealand's (NZ) life insurance industry. These variables are: assets-in-place, reinsurance, internal governance, firm size, product-mix and organizational form. Consistent with expectations, our results indicate that audit fees are influenced by product-mix and firm size. However, the other variables are found not to be statistically significant. The empirical results thus provide mixed support for contracting theory.