The existence of low balling on the Swedish audit market -A study of companies listed on the NASDAQ OMX Stockholm that voluntarily changed audit firm 2002-2010
Background and Problem: The lack of auditor independence is discussed being oneof the reasons to scandals such as Enron and HQ. A pricing strategy that has beendebated impairing auditor independence is low balling. To win a new client in atender process, audit firms supposedly offer an audit fee below cost and then increasethe fee the following years to recover the initial loss. The auditors? future financialinterest in the company due to the initial loss is by some believed to impair auditorindependence, which makes low balling in Sweden a relevant phenomenon to study.Aim of study: This thesis aims to explain if low balling exists on the Swedish auditmarket and if the size of companies affects the results of low balling.Methodology: To achieve the purpose of this thesis, a statistical study wasconducted. Data, found in annual reports of companies listed on NASDAQ OMXStockholm that changed audit firm 2002-2010, were analysed before and after thechange. 107 companies that changed audit firm during the period were identified. 56of these fulfilled our inclusion criteria; 21 companies listed on Small cap, 21 on Midcap, and 14 on Large cap.Analysis and conclusions: This study indicates that low balling exists on NASDAQOMX Stockholm and in Sweden. The average initial audit fee discount was -17.53%,the second year after the change the discount was -4.57%, and the fees were almostback to normal levels by the third year, -0.61%, from the estimated normal audit fee.The results correlate with the most recent research on the subject done in Sweden andGermany. Our findings suggest that the extent of low balling varies between the caps;it exists among companies listed on Small and Large cap but not on Mid cap.