Engaging Auditors: Field Investigation of a Courtship
52 Pages Posted: 6 Jan 2010 Last revised: 12 Jun 2013
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Engaging Auditors: Field Investigation of a Courtship
Date Written: December 18, 2009
Abstract
We report results of a field investigation of the process by which clients and prospective auditors acquire information about each other and enter an engagement. Often we assume that knowledge required for contracting is readily known by contracting agents, while in fact it must be acquired through a complex courtship process by agents with private and conflicting incentives. To examine this important aspect of the market for audit services, we obtain documents and conduct interviews on requests for audit proposal (RFPs) issued by a publicly traded Canadian company, as well as a Canadian government organization. We observed: (1) significant management control in selection of the external auditor; (2) asymmetry of transparency, whereby the client gathers detailed information about prospective auditors from multiple sources, but the auditors are reluctant to press prospective clients for information; (3) a selection process that requires the auditor to provide references from senior officers of current and past clients, and repeatedly demonstrate responsiveness and commitment to the prospective client’s management; and (4) extensive price competition, where one audit firm offered a bid materially below the previous year’s audit fee, and another firm offered three fee levels for different bundles of services. Implications of these observations for opacity of audit quality, auditor risk management, expertise differentiation, and auditor rotation are discussed.
Keywords: Auditor-Client engagement, auditor rotation, independence, field study
JEL Classification: M41, M44
Suggested Citation: Suggested Citation
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