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Auditor Changes and the Cost of Bank Debt0414Jennifer M Mueller-PhillipsJune 26, 2017
Spatial Competition in Local Audit Markets and the Fallout...0227Jennifer M Mueller-PhillipsMay 30, 2017
Shareholder Votes on Auditor Ratification and Subsequent...0273Jennifer M Mueller-PhillipsApril 19, 2017
Auditor Ratification: Can’t Get No &...0154Jennifer M Mueller-PhillipsApril 19, 2017
Audit Report Restrictions in Debt Covenants0377Jennifer M Mueller-PhillipsAugust 30, 2016
Investor Heterogeneity, Auditor Choice, and Information...0261Jennifer M Mueller-PhillipsMay 31, 2016
Small Audit Firm Membership in Associations, Networks, and...0282Jennifer M Mueller-PhillipsMay 31, 2016
Non-Big 4 Local Market Leadership and its Effect on...0300Jennifer M Mueller-PhillipsMay 31, 2016
Internal Control Opinion Shopping and Audit Market...0660Jennifer M Mueller-PhillipsMarch 31, 2016
Restatements: Do They Affect Auditor Reputation for Quality.0557Jennifer M Mueller-PhillipsFebruary 17, 2016
Do Clients Avoid “Contaminated” Offices? The Economic Con...0555Jennifer M Mueller-PhillipsJanuary 20, 2016
Management Influence on Auditor Selection and Subsequent...0211Jennifer M Mueller-PhillipsSeptember 17, 2015
The Value of Big N Target Auditors in Corporate Takeovers.0236Jennifer M Mueller-PhillipsSeptember 16, 2015
Do Private Company Targets that Hire Big 4 Auditors Receive...0193Jennifer M Mueller-PhillipsJuly 30, 2015
Does a Lack of Choice Lead to Lower Quality? Evidence from...0431Jennifer M Mueller-PhillipsMarch 11, 2015
Auditor industry expertise and cost of equity0380Jennifer M Mueller-PhillipsMarch 10, 2015
Can Big 4 versus Non-Big 4 Differences in Audit-Quality...0971Jennifer M Mueller-PhillipsMarch 4, 2015
Damaged Auditor Reputation and Analysts' Forecast...0269Jennifer M Mueller-PhillipsMarch 3, 2015
National Level, City Level Auditor Industry Specialization...0265Jennifer M Mueller-PhillipsFebruary 24, 2015
Determinants and Market Consequences of Auditor Dismissals...01725Jennifer M Mueller-PhillipsFebruary 24, 2015
Founding Family Ownership and the Selection of Industry...0364Jennifer M Mueller-PhillipsFebruary 15, 2015
A Reexamination of Audit Fees for Initial Audit Engagements...0486Jennifer M Mueller-PhillipsDecember 3, 2014
Market Reaction to Auditor Switching from Big 4 to...0732Jennifer M Mueller-PhillipsNovember 10, 2014
When the PCAOB Talks, Who Listens? Evidence from Stakeholder...0319Jennifer M Mueller-PhillipsJune 22, 2014
Bringing Darkness to Light: The Influence of Auditor Quality...0255Jennifer M Mueller-PhillipsJune 2, 2014
Evidence on the Association between Financial Restatements...0271Jennifer M Mueller-PhillipsJanuary 14, 2014
Does Audit Fee Homogeneity Exist? Premiums and Discounts...0416Jennifer M Mueller-PhillipsOctober 29, 2013
An Experimental Investigation of the Influence of Audit Fee...0408Jennifer M Mueller-PhillipsOctober 15, 2013
Recent Auditor Downgrade Activity and Changes in Client’s D...0309Jennifer M Mueller-PhillipsOctober 3, 2013
Changes in Audit Market Competition and the Big N Premium0242Jennifer M Mueller-PhillipsOctober 3, 2013
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Auditing Section - American Accounting Association

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  • Jennifer M Mueller-Phillips
    An Experimental Investigation of the Influence of Audit Fee...
    research summary posted October 15, 2013 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 03.0 Auditor Selection and Auditor Changes, 04.0 Independence and Ethics, 04.02 Impact of Fees on Decisions by Auditors & Management in Auditing Section Research Summaries Space public
    An Experimental Investigation of the Influence of Audit Fee Structure and Auditor Selection Rights on Auditor Independence and Client Investment Decisions
    Practical Implications:

     Lowballing has been cited as a threat to auditor independence and manager performance in regulatory reports and academic research. This study suggests that auditors may face independence issues at the beginning of a client relationship under the lowballing fee structure because of the uncertainty of retaining a client. The study also suggests, however, that these independence issues seem to dissipate over time. Therefore, auditors should be aware of these potential opportunities to lose objectivity when they acquire new audit clients and continue to rely on professional skepticism to evaluate management assertions.

    For more information on this study, please contact Darius J. Fatemi.


    Fatemi, D. J. 2012. An Experimental Investigation of the Influence of Audit Fee Structure and Auditor Selection Rights on Auditor Independence and Client Investment Decisions. Auditing: A Journal of Practice and Theory 31(3): 75-94.

    Audit fees; auditor independence; experimental economics; manager investment; auditor selection.
    Purpose of the Study:

    The purpose of this paper is to investigate the effect of audit fee structure on auditors, their clients, and investors. The author wanted to specifically investigate how a lowballing audit fee structure as opposed to a flat rate fee structure impacts:

    • manager investment decisions
    • the degree of investigation of management decisions by auditors
    • the price that investors pay for shares of the company

    The author also investigated whether a cause-effect relationship exists between the use of a lowballing audit fee structure (in which auditors provide initial services at reduced prices but at higher prices in later periods) and auditor independence when retention is of concern to the auditor.

    Design/Method/ Approach:

    The author utilized an experimental market using undergraduate accounting majors that were randomly assigned to the roles of managers, investors, and auditors.  The auditors followed either a lowballing fee structure or a flat rate fee structure. Auditor selection was performed by either the managers or the investors. The managers bid on firm assets and provided a disclosure of the value of the assets to the investors. Auditors decided the extent to which they investigated managers’ claims and either concurred with manager’s disclosures or they provided information that the auditors believed to be more accurate.


    Compared to the flat-rate fee structure, managers under a lowballing fee structure scheme were:

    • more willing to make a high cost/return investment
    • more concerned with the credibility of their reports

    Auditor behavior is summarized as a response to past manager choices: when managers were especially willing to invest and be honest, auditors performed fewer tests of manager disclosures. Additionally, under manager selection and when lowballing existed, auditors attributed a higher accuracy to investigations indicating high manager investment than tests that suggest low investment, while accuracy assessments of favorable and unfavorable test results did not differ under investor selection. Finally, auditor retention under manager selection was negatively impacted by both unreliable auditing and disagreements with managers, but retention was only affected by unreliable auditing under investor selection.

    Auditor Selection and Auditor Changes, Client Acceptance and Continuance, Independence & Ethics
    Audit Fee Decisions, Impact of Fees on Decisions by Auditors & Management