The Effect of Competitive Bidding on Engagement Planning and Pricing

27 Pages Posted: 4 Oct 2006

See all articles by Karla M. Zehms

Karla M. Zehms

University of Wisconsin - Madison - Department of Accounting and Information Systems

Jean C. Bedard

Bentley University - Department of Accountancy

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Abstract

This paper investigates how clients' choices regarding whether or not to engage in competitive bidding affect a bidding firm's decisions about planned engagement effort and pricing. Specifically, we investigate whether competitive bidding is associated with higher planned engagement effort and lower fees relative to noncompetitive bidding, and whether competitive bidding is associated with increased sensitivity of effort and fees to cost drivers and the components of service production. There is little available evidence regarding the effects of competitive versus noncompetitive bidding in the current market, and none that focuses on both quality and pricing effects associated with competitive bidding across a broad array of clients. We address these issues using data from a sample of one firm's evaluations of prospective clients, made during 1997-98. During that period, about half of the firm's bids were competitive and half were noncompetitive, providing a unique opportunity to study how the bidding environment affects engagement planning and pricing. Our findings reveal that competitive bidding is associated with higher planned engagement effort and lower fees. In addition, we find that in competitive bidding situations there are stronger associations between cost drivers and planned engagement effort, and between the components of service production and fees.

Keywords: Audit planning, Audit pricing, Competitive bidding, Quality

Suggested Citation

Zehms, Karla M. and Bedard, Jean C. and Ettredge, Michael L., The Effect of Competitive Bidding on Engagement Planning and Pricing. Contemporary Accounting Research, Vol. 21, No. 1, pp. 25-53, 2004. Available at SSRN: https://ssrn.com/abstract=934196

Karla M. Zehms (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-234-1052 (Phone)
608-265-5031 (Fax)

Jean C. Bedard

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2410 (Phone)
781-891-2896 (Fax)

Michael L. Ettredge

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

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