Lowballing of audit fees: the consequences and importance of the client

Today, due to the globalization of the service market, all companies are trying to increase their share in this market. In order to achieve this goal, in addition to high quality, they should also consider reducing the price. Audit institutions are not exempt from this and must compete with each other to stay in this market. Therefore, other audit firms to compete with large audit firms should be able to provide high-quality services at a lower cost and more appropriate audit fees. Because, large audit institutions have more reputation, which is considered a credit for their audit report. The purpose of this research is to examine the role of credit and the importance of the client in lowballing of audit fees in TSE companies.

The purpose of this study is descriptive and based on the nature and method of correlation. Considering that this research can be used in the decision making process of investors, the type of applied research is considered. In this research, library method has been used to collect data and information. Then, for collecting the research data, compact discs, visual and statistical archives of the Tehran Stock Exchange, the official website of Tehran Stock Exchange and other related online databases have been used. The data related to 95 TSE companies the between 2010 and 2020 were extracted and the combined data regression model was used to test the research hypotheses.

Based on the results of the research, the first hypothesis of the research based on the fact that there is a significant relationship between the client's credit and the lowballing of the audit fee has been confirmed. In the second hypothesis, the effect of the size of the audit firm on the relationship between the credit of the client and the lowballing of the audit fee has become significant. In the third hypothesis of the research, the effect of lowballing of the audit fee on the change of the audit fee in the following years of the audit of the client has become significant. Finally, the fourth research hypothesis showed that lowballing the audit fee has a significant impact on audit quality in the following years of the audit.

If the clients consider the increase in the audit fee as an increase in audit quality, they may show less resistance to the fee increase than expected, and when the decrease in the fee is appropriate, the demand of the clients to reduce the fee will be less than expected. The lowballing of the audit fee is a strong incentive to keep the client in the following years, in order to maintain the future stable income flow in order to compensate the fees of the early years.