Engaging Auditors: Field Investigation of a Courtship

65 Pages Posted: 20 Jan 2010 Last revised: 12 Jun 2013

See all articles by Krista J. Fiolleau

Krista J. Fiolleau

University of Waterloo

Kris Hoang

University of Alabama - Culverhouse College of Commerce & Business Administration

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

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Date Written: November 12, 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

Fiolleau, Krista J. and Hoang, Kris and Jamal, Karim and Sunder, Shyam, Engaging Auditors: Field Investigation of a Courtship (November 12, 2009). University of Alberta School of Business Research Paper No. 2013-1008. Available at SSRN: https://ssrn.com/abstract=1535074 or http://dx.doi.org/10.2139/ssrn.1535074

Krista J. Fiolleau

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

Kris Hoang (Contact Author)

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-5829 (Phone)
780-492-3325 (Fax)

Shyam Sunder

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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