Auditor low balling : Fee recoupment and non-audit services

Authors

Keith A. Houghton
Christinr Jubb

Document Type

Other

Publisher

Edith Cowan University

Place of Publication

Churchlands, Western Australia

Faculty

Faculty of Business

School

School of Accounting

Comments

Houghton, K.A., & Jubb, C. (1998). Auditor low balling : fee recoupment and non-audit services. Churchlands, Australia: Edith Cowan University.

Abstract

Several previous studies have examined the impact of auditor switching on audit fees. The underpinning theory of these studies is that a potential new auditor will cut initial audit fees (low ball) in order to secure an audit, and the ensuing stream of audit fees including a quasi-rent component payable to any incumbent auditor. Empirical evidence of the presence of audit fee cutting subsequent to an auditor switch is mixed. The present study proposes an alternative theory which argues that a potential new auditor will low ball in order to secure an audit but that such fee cutting is conditional on non-audit services (NAS) growth between the year prior to the auditor change and the first year of the new audit engagement. That is, the audit fee cut will be recouped by revenue generated from the provision of auditor supplied non-audit services. The study is based on data from 270 publicly listed Australian companies taken at a time when NAS fees provided by incumbent auditors were rising. The empirical evidence shows that auditees who report an auditor change together with real growth in the fees for auditor supplied non-audit services, show a significantly lower audit fee than situations in which these two conditions do not exist together. A number of limitations are discussed, including generalizability to other time periods and markets.