An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Dirk Simons
University of Mannheim

Abstract: A Green Paper of the European Union finds that audits of large and prestigious clients are hard-fought and discusses, whether an increasing competition could harm the auditors’ independence due to low balling. In most related models, e.g. in DeAngelo’s (1981) seminal paper, it is assumed that competi¬tion is perfect. However, empirical evidence suggests that perfect competition does not occur automatically. Thus our first goal is to identify model-endogenously conditions for the prevalence of perfect competition. The second goal is to analyze how different kinds of learning influence on the one hand the competition between audit firms and on the other hand the audit fees. Dynamic learning enables us to show, that low balling appears not only in the first period but for a longer time-span. Lastly, as audit firms of different size exist, in a third step true rents are calculated for a competition between a big and a small audit firm, meaning that the results’ robustness is checked.

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