The Cost of Initial Audit Engagements: An Analysis of Engagement Profit Margin in Private Company Audits

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Abstract

The purpose of this paper is to determine the prevalence and extent of lowballing in initial audit engagements. Specifically, I will investigate if the profit margin for initial audit engagements is significantly different from the profit margin for continuing audit engagements in the private company audit market. By using a unique data set of proprietary firm data from regional firms in Upstate New York, this paper will provide greater insight into lowballing in initial audit engagements in non-Big N firms engaging in private company audits. I compare the audit prices, audit costs, and profit margins for initial audit engagements performed during fiscal years 2010 – 2015 from regional firms in Upstate New York to the respective information from continuing audit engagements performed during the same time period. I expect to find that audit prices and profit margins are lower for initial audit engagements, while costs are higher. This study provides data supporting the validity of the previously used proxy of audit price for audit cost. Through the analysis of current costs of the engagement to the firm, this study provides further insight to the prevalence of lowballing, without the use of proxies. There is very little understanding of the private company audit market, and this study helps to contribute to the growing piece of the literature. This paper also begins to build a foundation for further understanding of the management practices of the local and regional accounting firms.

Author

• Christie Novak, Syracuse University