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| Author: | Elitzur, R. R. Falk, H. |
| Title: | Auctions for audit services and low-balling |
| Journal: | Auditing: A Journal of Practice and Theory
1996 : VOL. 15:SUPPL., p. 41-59 |
| Index terms: | AUCTIONS AUDITING SERVICE QUALITY PRICING |
| Language: | eng |
| Abstract: | This paper examines the auctions for audit services phenomena in a multi-period dynamic setting. In the model auditors are hired via an auction open to all auditors in the market. Each auditor type corresponds to a cost function which may evolve over time through the choice of client-specific audit technology. The results show that low-balling occurs whenever an auction for audit services is competitive. An auditor's bid provides a signal about that auditor's initial cost type or function. An incubent auditor's investment in client-specific audit technology may change the auditor's type and increase the client's disutility from switching. Investment in client-specific audit technology is reduced in the last expected engagement period. A bidder may under-estimate the client's audit cost and subsequently reduce audit quality. |
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