Thus auditors face trade offs between economic rents

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: o which economic forces impair auditors’ ability to provide high-quality audits. Prior research has studied several features of the market for audits to determine their effects on audit quality: (1) low-balling—setting audit fees in early periods below the cost of the audit (see Schatzberg 1990; Dye 1991; Craswell and Francis 1999); (2) providing management advisory services (Antle et al. 1997); and (3) direct and indirect financial and family ties (SEC 2000). Research has argued that counterbalancing forces reduce auditors’ incentives to misreport, including: (1) legal sanctions imposed by courts/regulators, and (2) market penalties from loss of reputational capital. Thus, auditors face trade-offs between economic rents from misreporting vs. potential economic penalties for misreporting. The policy debate typically centers on the strength of these various forces (U.S. Government Accounting Office 1996; Public Oversight Board Advisory Panel on Auditor Independence 1994; SEC 2000). However, psychological as well as economic forces can impair audit quality. Bazerman et al. (1997...
View Full Document

Ask a homework question - tutors are online