Thus auditors face trade offs between economic rents

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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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This note was uploaded on 01/27/2014 for the course ACCY 405 taught by Professor Staff during the Fall '08 term at University of Illinois, Urbana Champaign.

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