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The Effects of Business Risk on Audit Pricing

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  • John Morgan

    (Princeton University)

  • Phillip Stocken

    (University of Pennsylvania)

Abstract

This paper examines the pricing of business risk by homogeneous auditors in a two period model. Incumbent auditors learn the client's business risk type during the course of the engagement. They subsequently compete in prices with prospective auditors. In such an environment, we show that equilibrium audit fees do not fully reflect the cost of business risk. Moreover, there exists differential auditor turnover between high and low risk firms; cross-subsidization of the audit fees of high risk firms by low risk firms; and low-balling by auditors.

Suggested Citation

  • John Morgan & Phillip Stocken, 1998. "The Effects of Business Risk on Audit Pricing," Review of Accounting Studies, Springer, vol. 3(4), pages 365-385, December.
    • Handle: RePEc:spr:reaccs:v:3:y:1998:i:4:d:10.1023_a:1009687101871
    DOI: 10.1023/A:1009687101871
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