Demand Uncertainty and the Production of Audit Services

51 Pages Posted: 7 Sep 2019 Last revised: 15 Nov 2022

See all articles by Douglas Ayres

Douglas Ayres

Ball State University - Department of Accounting

Tyler J. Kleppe

University of Kentucky - Von Allmen School of Accountancy

Jonathan E. Shipman

University of Arkansas

Jason Stanfield

Ball State University

Date Written: November 8, 2022

Abstract

Economic theory suggests that demand uncertainty should influence producer behavior. In this study, we empirically examine the impact of demand uncertainty on the production of audit services. Auditors must make resource allocation decisions in advance of exact demand being known, and because a large portion of an auditor’s capacity-related commitments are fixed and therefore difficult to adjust in the short run, uncertainty in client demand outcomes likely imposes costs on auditors. Consistent with auditors being compensated for these costs, our results indicate that both audit price and audit production timing are affected by a client’s uncertainty in demand for audit services. We also find that these compensation mechanisms act as substitutes used by auditors to alleviate the costs imposed by demand uncertainty. Our study contributes to the growing literature on the underlying economics of the audit market and answers recent calls for analysis of demand-side factors that influence the audit industry.

Keywords: producer theory; demand uncertainty; capacity constraints; audit production

JEL Classification: M40, M41, M42

Suggested Citation

Ayres, Douglas and Kleppe, Tyler J. and Shipman, Jonathan E. and Stanfield, Jason W., Demand Uncertainty and the Production of Audit Services (November 8, 2022). Available at SSRN: https://ssrn.com/abstract=3446447 or http://dx.doi.org/10.2139/ssrn.3446447

Douglas Ayres

Ball State University - Department of Accounting ( email )

United States

Tyler J. Kleppe (Contact Author)

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States

Jonathan E. Shipman

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Jason W. Stanfield

Ball State University ( email )

United States
7654913581 (Phone)

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