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SUMMARY This study uses experimental markets to gain insights into the effect of audit fee structure and auditor selection rights on auditor independence and client investment decisions. I find that firm managers are more willing to make a high cost/return investment under a lowballing setting than when auditors are paid a flat rate. Auditor behavior is primarily summarized as a response to past manager choices; when managers are especially willing to invest and honest, auditors perform fewer tests of manager disclosures. I also show that under manager selection, when lowballing exists, auditors initially attribute a higher accuracy to investigations indicating high manager investment than tests that suggest low investment, but the difference in accuracy assessments dissipates with time. Under investor selection, accuracy assessments of test results do not differ according to their outcome. Further analysis indicates that auditor retention under manager selection is negatively impacted by both unreliable auditing and disagreements with managers, with only the former affecting retention under investor selection.

SUMMARY This paper summarizes Fatemi (2012), which reports the results of an experiment exploring the influence of audit fees on auditor and client decisions. The results indicate that clients are more likely to make choices that maximize a firm's value to shareholders when evidence of audit fee lowballing exists. When clients exhibit a past history of misstatements, auditors exhibit higher levels of skepticism as evidenced by an increased frequency of testing. Auditors' interpretations of test results reveal that they are subject to the psychological effect of motivated reasoning in the presence of lowballing when they are hired by their clients (but not when hired by investors), in that they place more confidence in the quality of tests that support their clients than in equivalent tests that are unsupportive. This article explains these findings and discusses their implications.

Understanding tax preferences toward the estate tax could help resolve the continuing debate on whether the tax should be repealed. Gathering public opinion, however, is not a simple task as differing frames can alter the solicited preferences. For example, the framing literature has shown that equivalent but countervailing frames can produce dissimilar responses. That is, providing positive descriptors of an attribute tends to lead to a more favorable evaluative response than does using negative descriptors (Levin et al. 1998). In contrast, the resistance literature has found that when respondents possess a prior counter attitude that conflicts with the descriptors, exposure to the descriptors can strengthen the original counter attitude. The estate tax, a contentious issue that is typically viewed negatively by taxpayers, provides an issue in which predictions from framing and resistance literatures are in direct contrast. Our study demonstrates that prior counter attitude reverses the expected framing effects. In sum, when respondents do not initially approve of an estate tax, favorable frames lead to more negative responses than do unfavorable frames.

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