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Contingent Fees for Audit Firms

1990; Wiley; Volume: 28; Issue: 2 Linguagem: Inglês

10.2307/2491149

1475-679X

Ronald A. Dye, Bala V. Balachandran, Robert P. Magee,

Corporate Finance and Governance

In this paper, we examine how auditors and their clients respond to the introduction of report-contingent audit contracts in a model of the audit market. Such contracts might appear inherently undesirable because they seem to compromise auditors' independence. Nevertheless, auditors in the United Kingdom are permitted implicitly to accept such contracts, because they can take an ownership interest in the firms they audit. In 1988, the U.S. Federal Trade Commission (FTC) attempted to pressure the AICPA into allowing contingent fee contracts for all services (including audits), although the FTC subsequently compromised by insisting on allowing contingent fees only for nonaudit work.1 This controversy surrounding the desirability of contingent audit fees motivates our study. In our model, auditors affect the value investors assign to a firm by reporting an estimate of the firm's earnings. Investors care about bans