You get what you pay for : An examination of audit quality when audit fee is low

We contribute to the long-standing debate among various capital market participants on whether auditing industry practices low-balling (charging low fees) which in turn compromises auditor independence and audit quality. Using a large sample representing years 2000-2006, we first estimate unexpected (abnormal) audit fee as residuals from a regression of audit fee on several determinants of audit fee. Next, we run a regression of going concern opinions and other audit quality measures on unexpected audit fee and control variables. Our results suggest that audit quality is lower when unexpected audit fee is negative, i.e., actual audit fee is less than the expected fee. Further, there is no evidence that audit quality is impaired when unexpected audit fee is positive. These findings are consistent with the notion that when auditors earn excess fees they are mindful of the perceived threat to their independence in appearance and take steps to preserve their reputation capital.