Determinants of Low-Balling of Audit Fees and Subsequent Recovery
Posted: 15 Sep 2016
Date Written: September 12, 2016
Auditors’ low-balling in initial engagements is a longstanding concern for regulators and others. We examine the determinants and consequences of low-balling using more recent data. We provide evidence that auditors are likely to low-ball if they are “Big N” auditors, expect future revenues from non-audit services, or are quoting large, profitable, and important clients. Further, low-balling auditors tend to recoup their initial fee discounts in subsequent periods via increases in audit and non-audit fees. We also find that clients of low-balling auditors are more likely to restate in the subsequent period. Our findings suggest that low-balling is associated with greater future economic dependence on the client and have implications for auditor independence and audit quality.
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