Effects of Initial Audit Fee Discounts on Audit Quality: Evidence from <scp>G</scp>ermany

Abstract

We examine the presence and magnitude of initial audit engagement fee cutting and its potential effect on audit quality in G ermany using a sample of 992 firm‐year observations from 2005 through 2011. Our results show systematic fee cutting for initial audit engagement years in G ermany. Despite significant audit fee differences between initial and subsequent audit engagement years, we do not find differences in audit quality. Overall, our findings support prior empirical studies, suggesting that low‐balling is merely a natural response of auditors to competitive audit market conditions and does not necessarily impair auditor independence. In the wake of the on‐going discussion in the European Union regarding the control of appointment, remuneration, and duration of audit engagements to curb threats to auditor independence, our findings do not support the implementation of audit market price controls through governmental regulators.