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

Abstract

SUMMARY Audit fee lowballing is defined as charging relatively lower audit fees at the start of an audit engagement and increasing fees subsequently to recover the initial lowballing cost. This practice, employed to attract new clients, concerns regulators because of its potential consequences for audit quality. We examine the relation between audit partner industry experience and lowballing, and its implications for subsequent audit fees and audit quality. Our results indicate that higher audit partner industry experience is associated with discounted fees but superior audit quality in the first year of the engagement, suggesting that more-experienced auditors pass on cost savings from process efficiencies to their clients. We also find that for audit partners with higher (lower) industry experience, subsequent fee increases are relatively low (high). This implies that auditors with lower industry experience lowball in the initial year of the engagement and subsequently hike fees to recover the initial-year lowballing costs. Data Availability: Data used in this study are available from public sources identified in the text. JEL Classifications: M42.