AUCTIONS FOR AUDIT SERVICES AND LOW-BALLING

Focusing on ''low-ball'' pricing, we examine the auctions for audit se rvices phenomena in a multi-period dynamic setting. In our model, audi tors are hired by clients via an auction which is open to all auditors in the market, There are multiple types of utility-maximizing auditor s in the market. Each auditor type corresponds to a cost function whic h may evolve over time through the choice of client-specific audit tec hnology. While the set of all auditor types is publicly known, the par ticular type of any individual auditor is private information. Our stu dy has resulted in several findings. First, low-balling occurs wheneve r an auction for audit services is competitive. Second, an auditor's b id provides a signal about that auditor's initial cost function or typ e. Third, an incumbent auditor's investment in client-specific audit t echnology may change the auditor's type and, in turn, increase the cli ent's disutility from switching. Fourth, investment in client-specific audit technology is reduced in the last expected engagement period. F ifth, although the low-ball bidding process results in information abo ut bidders' types, a bidder may under-estimate the client's audit cost and subsequently reduce audit quality.