The Effects of Audit Partner’s Industry Experience on Lowballing, Subsequent Audit Fees and Audit Quality

• In Event: 5.02. Audit Quality Indicators

Abstract

Lowballing is the practice of setting relatively lower audit fees during the initial year of an audit engagement and increasing the fees in the subsequent years to recover the initial year fee discount. This practice is employed by auditors to better compete for new clients. This practice is of concern to the profession as it has been shown to negatively affect audit quality. This study examines if greater audit partner industry experience (number of firm-years an audit partner has been engaged as an auditor in a particular industry) reduces initial year audit fee lowballing and also if lowballing is associated with lower audit quality. Our overall results, consistent with prior research, indicate that higher industry experience is associated with a relative fee discount in the first year of the audit engagement. This implies that auditors with higher expertise pass on process efficiencies to their clients. More importantly, our results indicate that despite charging relatively lower audit fees, more experienced audit partners provide superior audit quality. Additionally, our results also reveal that in subsequent years, fee increases are negatively related to level of auditor industry experience. This suggests that auditors with relatively lower industry experience could be low balling in the first of year of the engagement and then charging relatively higher fees in subsequent years to recover the initial year discounts from lowballing.

Authors

• Naman Desai, University of California, Riverside

• Birendra Kumar Mishra, University of California-Riverside

• Theodore Jaye Mock, University of California-Riverside

• Siddharth Mahendra Purohit, Indian Institute of Management Ahmedabad