The Effects of Lowballing on Audit Quality: An Experimental Markets Study

Abstract

The purpose of this study is to investigate the potential effects of low-balling on audit quality. Critics of the audit industry often allege that the practice of lowballing (charging fees below the marginal cost of an audit) provides a potential incentive for auditors to reduce their audit quality in order to be retained for future engagements with a client. We investigated this issue using experimental methods that had subjects (verifiers) providing a verification service for sellers of assets. Our results indicate that lowballing did not materially reduce service quality, relative to benchmark settings without lowballing when subjects interacted in markets. However, lowballing did have a material effect in a setting with the combined conditions of a high degree of lowballing and no competitive market for the services.

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