The Effects of Demand Uncertainty on the Production of Audit Services

• In Event: Audit Markets 1

Abstract

Economic theory suggests that demand uncertainty should influence producer behavior. In this study, we empirically examine the impact that demand uncertainty has on the production of audit services. Auditors must make resource allocation decisions in advance of exact demand being known. Because a large portion of an auditor’s capacity-related commitments are fixed and therefore difficult to adjust in the short run, any variability in client demand outcomes likely imposes significant risk on auditors. Our results indicate that both audit price and audit production delay are positively related to a client’s uncertainty in demand for audit services. We also find that price and production delay act as substitute mechanisms used to alleviate the pressure that demand uncertainty imposes on auditors. 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.

Authors

• Douglas Ayres, Butler University

• Tyler Kleppe, University of Arkansas

• Jonathan Shipman, University of Arkansas-Fayetteville

• Jason W Stanfield, Ball State University