Unaffiliated component auditors and audit fee models: the case of lowballing

Angela Pettinicchio, Peter F. Pope and Alessandra Scimeca

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Disclosure rules in many countries require public companies to report fees paid to the principal audit firm and its affiliates, but not to unaffiliated component auditors (UCAs). Reported fees thus depend on component auditor affiliation. We show that UCA involvement is significant in many countries. Using Italian private companies’ public filings, we find that UCA involvement is a statistically and economically significant source of bias in audit fee models. This bias is particularly relevant around principal auditor changes, when some subsidiaries temporarily retain UCAs before switching to auditors affiliated with the new principal auditor. The exclusion of fees paid to temporary UCAs explains the initial-year audit fee discount (lowballing) previously documented, which disappears once these omitted fees are accounted for. Our results suggest that lowballing reflects measurement bias rather than systematic strategic pricing. Because UCAs are common internationally and disclosure rules similarly exclude these fees, this bias extends beyond Italy.

Keywords: ARRAY(0x5e41a52d6d30) (search for similar items in EconPapers)
JEL-codes: M42 (search for similar items in EconPapers)
Date: 2026-10-21
New Economics Papers: this item is included in nep-acc
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Published in Journal of Accounting and Economics, 21, October, 2026. ISSN: 0165-4101

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