eThesis - Kauppakorkeakoulun sähköiset gradut

The objective of this thesis is to examine whether there is a sign of lowballing in the initial audit engagement with a new auditor. I also examine how audit fees develop surrounding an auditor change. Auditors can be divided into big 4 and non-big 4 auditors. Therefore, companies can switch from big 4 or non-big 4 auditors into big 4 or non-big 4 auditors, hence there are four different types of auditor changes. I am interested in examining the effect of lowballing in these different kinds of auditor changes.

The research is quantitative and regression analysis is utilized while analyzing the data. The data of this research covers information of US companies from 2008 to 2014 and it includes 30 626 firm-year observations. The effect of lowballing is assessed by examining the effect of auditor change on audit fee, and the similar analysis is performed while examining the lowballing within different auditor changes. The audit fee development is analyzed by comparing means of audit fees' natural logarithm.

My findings indicate that there is a sign of lowballing in initial audit with a new auditor. However lowballing is also examined more thoroughly as the development of audit fees surrounding the auditor change is also investigated. Results indicate that for auditor switchers audit fees continue to grow from the initial engagement to the third year of engagement, and in the third year of the engagement the level of audit fees has exceeded the prior-change level of audit fees. The strongest effect of lowballing is found when companies switch from non-big 4 auditors to big 4 auditors.