Does Low-balling Impair Audit Quality?

• In Event: DSFI no. 1

Abstract

We examine whether low-balling impairs audit quality. Low-balling refers to the practice of offering below cost initial audit engagement fees with the intention of recovering losses in subsequent years. Because low-balling makes auditors financially dependent on management, it can threaten auditor independence, integrity and objectivity. Consistent with this notion, we find that low-balling is adversely related to audit quality, particularly when firms do not have accounting financial experts on their audit committee. The latter suggests that low-balling has a less adverse impact on audit quality when audit committees have a better understanding of audit risks and the nature of audit effort needed to respond to those risks. Overall, our findings suggest that low-balling adversely impairs audit quality unless audit committees have sufficient accounting financial expertise to closely monitor auditors.

Authors

• David Hendrik Erkens, University of Southern California

• Joonil Lee, Kyung Hee University

• Peter Oh, University of Southern California

• Karen Ton, Emory University