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A laboratory market investigation of low balling in audit pricing

Article Abstract:

Six controlled laboratory experiments were conducted to examine auditors' behavior in the low-balling of audit prices, in which auditors charges fees that are lower than cost to attract clients. Some analysts have hypothesized the practice negatively affects auditors' independence. The research tests economic concepts of auditing through the use of experimental economics and provides a framework for examining auditor pricing behavior. The experiments assumed competitive markets were extant, and hypothesized that where transaction costs are positive, there are cost advantages accrued to incumbent audits. Research results collaborate the hypotheses and suggest that positive transaction costs may be the cause of low-balling behavior. The results also suggest Low-balling does not occur in markets that lack positive transaction costs.

Behavior, Auditors

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An examination of the effects of experience and task complexity on audit judgments

Article Abstract:

The experience effect is important in decision-making when task complexity is given explicit consideration. The results of a group of experiments is reported in which structured, semi-structured, and unstructured tasks are examined for subjects pooled into experienced and inexperienced groups of auditors. A separate study of 88 managers and partners was used to establish independently the appropriate staff level for each task and complexity. Significant decision differences were shown between experimental groups on each task. Only an isolated significant experience effect was found when all the subjects were pooled together, demonstrating the need for explicit consideration, control for task complexity, and appropriate normative skills in researching the nature of expertise.

Decision-making, Decision making, Experience

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Consistency exceptions: materiality judgments and audit firm structure

Article Abstract:

Three elements of auditor materiality judgments are examined: their relationship with publicly available financial data, whether across Big Eight firms there are differences in materiality judgment consensus, and whether there is a correlation between audit firm structure and judgment consensus. Results indicate that nine publicly accessible financial measures explain a substantial part of the variability in auditor materiality judgments. This raises a query about potential data in auditors' interest-capitalization consistency exceptions.

Public finance, Disclosure statements (Accounting), Government accounting

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