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1、JournalofAccountingandEconomics3(1981)113-127.North-HollandPublishingCompanyAUDITORINDEPENDENCE,'LOWBALLING',ANDDISCLOSUREREGULATIONLindaElizabethDeANGELO*TheWhartonSchool,UniversityofPennsylvania,Philadelphia,PA19104,USAReceivedAugust1980,finalversionreceivedJanuary1981Thispaperinvest
2、igatestheallegationsoftheCommissiononAuditors'ResponsibilitiesandtheSecuritiesandExchangeCommissionthat'lowbaUing'oninitialauditengagementsimpairsauditorindependence.Wedemonstratethat,contrarytotheseclaims,'lowballing'doesnotimpairindependence;ratheritisacompetitiveresponsetotheexpecta
3、tionoffuturequasi-rentstoincumbentauditors(due,e.g.,totechnologicaladvantagesofincumbency).'Lowballing'intheinitialperiodistheprocessbywhichauditorscompetefortheseadvantages.Critically,initialfeereductionsaresunkinfutureperiodsandthereforedonotimpairauditorindependence.Theimplicationsf
4、orcurrentregulationgoverningchangesofauditor(AccountingSeriesReleaseNo.165etal.)andauditfees(AccountingSeriesReleaseNo.250)arealsodiscussed.1.IntroductionThepracticeof'lowballing'(settingauditfeesbelowtotalcurrentcostsoninitialauditengagements)hasbeencitedbyboththeSecuritiesandExchange
5、CommissionandtheCommissiononAuditors'Responsibilities(CohenCommission)asimpairingauditorindependence.Whilebothpartieshaveexpressedconcernabout'lowbailing',neitherhasestablishedacausallinkfromthispricingpracticetoimpairedindependence.Inotherwords,policy-makerslackapositivetheorywhichtie
6、stheintertemporalfeestructureofauditservicestoauditorindependence.Thepurposeofthispaperistoprovidethatlink.Wearguethattheexistenceofclient-specificquasi-rentstoincumbentauditorsbothlowerstheoptimalamountofauditorindependenceandleadsto'lowballing'intheinitialperiod.Importantly,whilethes
7、etwoeffectsareassociated,'lowballing'doesnotitselfimpairauditorindependence.Theexpressedregulatoryandprofessionalview,however,isjusttheopposite.Forexample,theReportoftheCommissiononAuditors'*Theauthorwishestothankthemembersofherdissertationcommittee:Y.Barzel,W.L.Felix(Chairman),E.Nor
