ISBN:  Unavailable

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Page count: 101

ABSTRACT: The extant audit pricing literature has provided little support for the existence of a relationship between low balling and impaired auditor independence. Nonetheless, for over thirty years regulators have expressed concerns that a positive relationship exists between low balling and impaired auditor independence. Recent evidence suggests that low balling occurs because auditors fall prey to the winner's curse (Hobson, Mellon, and Stevens 2010). However, no link has been made between this form of low balling and auditor independence. Consistent with regulators concerns, I provide evidence of a positive relationship between this form of low balling and impaired auditor independence by shirking. The evidence suggests that when pricing is not considered, auditors select a less than economically optimal level of audit effort. Upon realization by the auditor that a low ball price offer has been accepted, their effort is further reduced. Evidence is also provided that the amount of audit effort is a function of the auditors' social orientation and their prior experiences with shirking. Auditors whose prior shirking went undetected and who experienced positive outcomes are more likely to shirk in the future; whereas, auditors whose prior shirking was detected and penalized are less likely to shirk in the future.