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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...
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- Fall '08