Scale efficiency and marginal revenue product at the audit service level: evidence from Korea

This paper aims to evaluate scale efficiency and the marginal revenue products (MRP) of labour in the Korean accounting industry. Around the world, the fierce competition in the accounting industry has required accounting firms to adjust their input mix or increase scale efficiency in audit services. A translog revenue function is estimated to represent the technological relationship between audit fees and audit professionals' input hours. The sample comprised 1,025 individual audit services for two years from 2014 to 2015. The estimation of the model indicates that decreasing returns-to-scale prevailed in audit services throughout the sample period. However, when we broke down the sample into Big4 and non-Big4 audits, scale efficiency existed only in the Big4 audits. This implies that the non-Big4 audits were likely to be under-compensated for their audit hours. The estimated MRP signifies that partners were likely to be under-compensated compared to their contribution to audit fees.