How do auditors respond to competition? Evidence from the bidding process

70 Pages Posted: 23 Feb 2018 Last revised: 28 Dec 2021

See all articles by Nicholas Hallman

Nicholas Hallman

University of Texas at Austin

Antonis Kartapanis

Texas A&M University - Mays Business School

Jaime J. Schmidt

University of Texas at Austin

Date Written: November 30, 2021

Abstract

Prior research provides mixed evidence about whether competition among auditors impairs or improves audit quality. An impediment to this stream of research is the inability of researchers to observe the audit engagement bidding process. We develop a method of detecting bidding by applying a machine learning algorithm to non-incumbent (i.e., competitor) auditor views of public companies’ SEC filings. We validate our method using a proprietary sample where all instances of bidding are known. We then examine the associations between bidding, audit quality, and audit pricing. Contrary to concerns that competitive pressure may cause auditors to compromise their independence, we find that incumbent auditors perform higher quality audits during bidding years. This improvement in audit quality occurs regardless of whether the bidding ultimately results in an auditor change and persists for several years when the incumbent auditor wins reappointment. We also find that bidding is associated with modest audit fee concessions.

Keywords: auditor competition, audit market concentration, audit quality, audit fees

Suggested Citation

Hallman, Nicholas and Kartapanis, Antonis and Schmidt, Jaime J., How do auditors respond to competition? Evidence from the bidding process (November 30, 2021). Journal of Accounting & Economics (JAE), Vol. 73, No. 1, 2022, Available at SSRN: https://ssrn.com/abstract=3124722 or http://dx.doi.org/10.2139/ssrn.3124722

Nicholas Hallman

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Antonis Kartapanis

Texas A&M University - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States

Jaime J. Schmidt (Contact Author)

University of Texas at Austin ( email )

Austin, TX 78712
United States

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