Industry specialist auditors and affiliated business groups: An examination of fee lowballing and audit quality

Abstract

We examine the lowballing fee strategy of industry specialist auditors and their related audit quality, for engagements with affiliated business groups (ABGs) in Taiwan. Taiwanese auditors must sign their audit reports. This enables us to identify specialist audit engagement partners and examine their association with fee strategies and audit quality for specific clients. ABGs are generally large and complex and have extensive related‐party transactions. This elevates the levels of audit risk and audit effort and suggests a need for higher fees. Industry specialist auditors generally do not need to lower their fees to compete for clients. Yet, for new ABG clients, we find they are associated with lowballing, especially for ABGs with high business‐relatedness. We do not find evidence of lower audit quality for these new ABG clients. We thus conclude that industry specialist auditors evidently anticipate higher future value from increasing their market share among certain ABG clients.