| Abstract |
Using a unique set of Korean data for the years 2004-2012, we examine the effect of audit hour elasticity to audit fees on lowballing and audit quality. To address this question, we infer
an audit firm's flexibility in resource adjustment from a regression of changes in logged audit
hours on changes in logged audit fees for all audit clients of each audit firm (i.e., audit hour
elasticity). We find that audit firms on average offer fee discounting for new clients, and
more importantly, audit firms with more elastic audit hours are more likely to do so. Further,
we find that the effect of audit hour elasticity on lowballing is more pronounced for clients
with higher expected quasi-rents. However, we find no evidence suggesting that audit quality
of such auditors is compromised due to lowballing. Overall, our findings suggest that audit
firms with high audit hour elasticity are able to lowball without sacrificing audit quality. |