This paper examines the role of auditee profitability in pricing new audit engagements. Changes in the auditing environment are noted that suggest that auditors are managing their practices differently than they did in prior years. Audit fees are examined to answer two questions: (1) whether CPA firms still discount fees for new engagements in the current audit environment; (2) whether such fee discounts are dependent upon auditee profitability. The results suggest that auditors still discount new engagements in the 1990s, but that they are less willing to offer discounts when auditees show losses in the year prior to the new audit engagement. Further, this result is stronger for companies that switch from non‐Big 6 firms to Big 6 firms than it is for intra‐Big 6 switches. These findings suggest that auditors are managing their exposure to audit risk by adjusting audit fees.
Skip Nav Destination
Article navigation
1 March 2000
Research Article|
March 01 2000
The Role of Auditee Profitability in Pricing New Audit Engagements
Paul L. Walker, Assistant Professor;
Paul L. Walker, Assistant Professor
aColorado State University.
Search for other works by this author on:
Jeffrey R. Casterella
Jeffrey R. Casterella
bUniversity of Auckland.
Search for other works by this author on:
Online ISSN: 1558-7991
Print ISSN: 0278-0380
American Accounting Association
2000
AUDITING: A Journal of Practice & Theory (2000) 19 (1): 157–167.
Citation
Paul L. Walker, Jeffrey R. Casterella; The Role of Auditee Profitability in Pricing New Audit Engagements. AUDITING: A Journal of Practice & Theory 1 March 2000; 19 (1): 157–167. https://doi.org/10.2308/aud.2000.19.1.157
Download citation file:
Pay-Per-View Access
$25.00