Low Balling Research Articles

An empirical investigation of the market for ‘single audit’ services

Audits conducted under the 1984 Single Audit Act go beyond the traditional financial statement audit by placing substantial additional emphasis on the review and evaluation of internal controls and testing of compliance with laws and regulations. The General Accounting Office (GAO), congressional committees, and the American Institute of CPAs (AICPA) have expressed concern about the possible effects of the single audit on audit fees, the quality of single audits, and the effects of alleged low balling. This article provides evidence bearing on these issues, based on data for a national sample of cities.

Determinants of Fee Cutting on Initial Audit Engagements

This study extends Simon and Francis' [1988] estimates of average cross-sectional fee cutting on initial audit engagements by describing the distribution of percentage fee changes reported by 389 client firms which switched auditors from 1983 through 1987.1 In addition, this study attempts to explain cross-sectional variance in fee cutting for a subset of 163 client firms for which required data are available. Prior research suggests that cross-sectional variance in fee cutting may exist if (1) auditor low balling varies with the financial health of clients; (2) new auditors differ from old auditors on fee-relevant dimensions such as auditor class, industry expertise, and technological efficiency; and (3) the number of auditors bidding differs across engagements. Our results support the importance of these factors in determining percentage fee cuts, with the exception of the financial health of clients. Section 2 discusses background literature and identifies factors potentially associated with fee cuts. Section 3 describes the sample and variables. Statistical tests are presented in section 4, and section 5 summarizes the results.

Auditor independence, ‘low balling’, and disclosure regulation

This paper investigates the allegations of the Commission on Auditors' Responsibilities and the Securities and Exchange Commission that ‘low balling’ on initial audit engagements impairs auditor independence. We demonstrate that, contrary to these claims, ‘low balling’ does not impair independence; rather it is a competitive response to the expectation of future quasi-rents to incumbent auditors (due, e.g., to technological advantages of incumbency). ‘Low balling’ in the initial period is the process by which auditors compete for these advantages. Critically, initial fee reductions are sunk in future periods and therefore do not impair auditor independence. The implications for current regulation governing changes of auditor (Accounting Series Release No. 165 et al.) and audit fees (Accounting Series Release No. 250) are also discussed.