Contingent Fees for Audit Firms

The article presents an exploration into the auditor-client response to report-contingent audit contracts within an audit market model. Factors concerning positive and negative incentives to initiate such contracts are mentioned. The discrepancies inherent within the model between auditor's public issued estimates and personal opinions are analyzed and their impact on market competition for audit services is outlined. An application of Gresham's Law to auditing is presented, wherein poor quality services hinder legitimate services. Conclusions are offered regarding predictions of auditor attitudes towards standards due to revenue-based externalities.