Multi-period Accounting Bias and Audit Pricing
47 Pages Posted: 11 May 2021
Date Written: May 10, 2021
This paper addresses the impact of the interaction between the auditor's audit quality choice and the client firm's accounting choice on audit pricing. In a multi-period model, I focus on a central feature of accounting: reversing accruals. I find that low-balling arises independently from the direction of the accounting bias, but increases with a higher level of conservatism in the initial period. Further, auditors lower the audit quality as a response to conservative accounting. Therefore, a large low-balling discount is correlated with low audit quality in the first period, but does not cause it. The driving force is accounting conservatism.
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