Auditor independence, ‘low balling’, and disclosure regulation

https://doi.org/10.1016/0165-4101(81)90009-4Get rights and content

Abstract

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.

References (21)

  • A. Arens et al.

    Auditing: An integrated approach

    (1976)
  • H. Arnett et al.

    CPA firm viability

    (1979)
  • D. Causey

    Duties and liabilities of public accountants

    (1979)
  • L. Ciko

    Finance director defends Slidell accounting system

    The Times-Picayune

    (1979)
  • Commission on Auditors' Responsibilities

    Report, conclusions, and recommendations

    (1978)
  • H. Demsetz

    Why regulate utilities?

    Journal of Law and Economics

    (1968)
  • V. Goldberg

    Regulation and administered contracts

    Bell Journal of Economics

    (1976)
  • B. Klein et al.

    Vertical integration, appropriable rents, and the competitive contracting process

    Journal of Law and Economics

    (1978)
  • S. Macaulay

    Non-contractual relations in business: A preliminary study

    American Sociological Review

    (1963)
  • J. McGee

    Predatory price cutting: The Standard Oil (N.J.) case

    Journal of Law and Economics

    (1958)
There are more references available in the full text version of this article.

Cited by (0)

The author wishes to thank the members of her dissertation committee: Y. Barzel, W.L. Felix (Chairman), E. Noreen, and E.M. Rice. Helpful comments were provided by H. DeAngelo, R. Adelsman, R. Leftwich, J. Zimmerman, R. Watts, N. Gonedes, W. Lanen, and the participants in the Accounting Workshop at the University of Rochester. Substantial improvements were made by incorporating the suggestions of the referee, G. Jarrell. The author retains the property rights to any remaining errors.

View full text