Information Asymmetry and Competitive Bidding in Auditing

Abstract

This article finds that clients with greater risk of fraud are less likely to engage prospective auditors in competitive bidding, consistent with the theory that these companies seek to limit access to information that might reveal their high-risk status. In contrast, we find no support for the expectation that companies with higher agency costs will seek competitive auditor bids, due to the need for better monitoring. Our results also show that bidding competition is more likely when the bidding firm is not an industry specialist, when clients have more active corporate governance, and when there are difficulties with the predecessor auditor.(JEL D44, D82, M42)