Abstract This research examines the "price cutting" issue to determine whether auditing firms differentially price the audits of new clients, as suggested by the results of a recent study by Simon and Francis 1988. Evidence presented here indicates the existence of a negative price differential on initial engagements during the 1982-1984 time period. In particular, auditing fees for new clients are found to be significantly lower than those for continuing engagements when controlling for the influence of other audit fee determinants. Additional tests indicate that this differential persists into the second year following a change in auditor, occurs in "switches" to both Big Eight and smaller-sized auditing firms, and occurs even on initial audits of relatively unprofitable companies.
Richard A. Turpen (Thu,) studied this question.