New Evidence on an Old Question: Does Lowballing Undermine Auditors' Independence or their Clients' Investment Decisions?

Abstract

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.

Audit rotation and audit fee determination policy on audit quality with lowballing audit practice as the intervening variable

“…This matter, contrary to the SEC and the Cohen Report, argue that lowballing harms auditor independence. Lowballing is said to have negative consequences (Magee andTseng 1990 in Fatemi, 2013;Dopuch and King, 1996) because auditors have a financial attachment to clients, so the practice of lowballing might damage the ability of auditors to be independent of managers (Fatemi, 2013). Public disclosure of audit fees will improve audit quality because it will strengthen auditor independency (Craswell and Francis, 1999).…”

The Effect of Lowballing on Auditor Independence and Audit Opinion (Case Study at the Public Accounting Office for the Special Capital Region of Jakarta)

“…Thus the client will survive after the situation changes with the assumption that the client will pay more in the next period (Cialdinit, R. B., Capcioppo, J. T., Basset, R. &Miller, 1978 in Jonasson andTungel, 2012). Fatemi (2013) observed that when there is lowballing, managers will accept an engagement with the KAP in the hope that the auditor will disclose a higher asset value so that it is trusted by investors. Lowballing encourages the auditor to make an opinion that benefits the client at the beginning of the period and this condition is used by the auditor to obtain income in the hope that the client will carry out an audit engagement in the next period (Dye, 1991).…”

“…1. Lowballing has a significant effect on auditor independence, Lowballing is said to have negative consequences (Magee andTseng 1990 in Fatemi, 2013;Dopuch and King, 1996) because the auditor has a financial attachment to the client, so lowballing practices may damage the auditor's ability to behave independent of managers (Fatemi, 2013). However, when the auditor obtains a higher fee (premium), the auditor will be careful of any threat to the independence of their appearance (Gupta et.…”

“…In his research entitled Auditor independence, Low Balling and Disclosure Regulation, it concluded that lowballing had no effect on auditor independence. Fatemi (2013) also conducted the same research and the results of lowballing affected auditor independence. Similar to the research conducted by Elitzur and Falk (1966) his research proved that Lowballing influences auditor independence but with the dependent variable in the form of audit services.…”

Pengaruh Audit Tenure Dan Lowballing Terhadap Pemberian Opini Audit

“…Dalam penelitiannya yang berjudul Auditor Independence, Low Balling and Disclosure Regulation, menghasilkan kesimpulan bahwa lowballing tidak berpengaruh terhadap independensi auditor. Fatemi (2013) juga melakukan penelitian yang sama dan hasilnya lowballing berpengaruh terhadap independensi auditor. Serupa dengan penelitian yang dilakukan oleh Elitzur and Falk (1996).…”