Abstract This article examines the relationship between audit quality and growth in audit-relevant parameters, especially in the context of recent inflationary trends within the European Union. Using a formal model, it analyses how increases in variable audit costs influence auditors’ decisions on the level of audit effort, which directly impacts audit quality. The study finds that if statutory liability limits remain fixed in nominal terms while audit costs rise, auditors’ incentives to maintain high-quality audits weaken. This leads to lower audit effort and thus to reduced audit quality. At the same time, total audit costs are increasing, resulting in higher audit fees for the auditee. From the auditee’s perspective, the value of an audit depends on balancing the benefits of improved quality—primarily through reducing the risk of financial misstatements—against rising costs. The paper derives a neutrality condition that shows how liability limits must grow to keep audit quality stable in real terms. While it is relatively straightforward for auditors to maintain incentives by adjusting liability limits, the auditee’s assessment is more complex due to differences between audit cost growth and inflation, and uncertainties about potential claims. Because of these factors, no universal solution for a constant optimal level of audit quality exists. The findings highlight the need for periodic review and adjustment of liability limits to sustain audit quality. This study contributes to a deeper understanding of the dynamic relationship between economic growth, audit costs, and liability frameworks, offering insights for policymakers and practitioners in a changing economic environment.
Steller et al. (Mon,) studied this question.