Do auditors behave differently in initial-year engagements?

Purpose This study aims to investigate successor auditor behavior in initial-year audits in terms of fees charged, effort, quality and conservatism and to determine whether such behavior is influenced by auditor or client characteristics. Design/methodology/approach Data were gathered from the CRSP, audit analytics and Capital IQ databases.Ordinary least squares regression models were used using multiple proxies for the variables of interest. To ensure robustness of the results, two distinct matching methods were applied. Findings Potential lowballing in initial-year audits is not linked to auditor behavior in terms of effort, conservatism or quality. Despite evidence of reduced audit fees for initial-year engagements, no discernible difference exists in auditors’ treatment of new clients in terms of conservatism, effort or quality. These findings are consistent across variations in auditor and client characteristics. Practical implications The findings are important for legislators because they often revisit the issue of firm/partner rotation and the association between lowballing and auditor independence. Further, they relate to several standards on the acceptance of new clients, planning and risk assessment and quality control and are therefore relevant to standard setters. Originality/value To the best of the author’s knowledge, this study is the first to examine auditor behavior during initial-year audits by contrasting initial engagement fees with audit effort, conservatism and quality. Additionally, it explores whether auditor and client characteristics affect auditor behavior during such engagements.