Audit market competition: auditor changes and the impact of tendering

Increased competition within the external audit market and the recent phenomenon of audit tendering has renewed interest in the factors influencing auditor changes. In this paper, a questionnaire instrument is used to elicit perceptions of the factors which influence auditor-client realignments in this new environment and to indicate the relative influence of economic and behavioural factors. Positive, statistically significant associations were found between unsolicited approaches and the consideration of either a change in auditor or the conduct of a competitive tender. Fees are both the most frequently cited reason for considering auditor change and the most frequently cited factor influencing the selection of a new auditor. The chemistry of the relationship with senior audit firm personnel was ranked as more important than service issues in new auditor selection. Several significant associations between the reasons for change and both company size and type of change are identified. In particular, smaller companies, and companies changing from a non-Big Six firm, were more likely to change due to the need for a wider range of services and the influence of third parties. Findings indicated that 55% of auditor changes were effected by means of a tender, with the incumbent auditor having only an 18% chance of retaining the client. The various stages of the tender process appear to be dominated by the finance director, with audit committees having a restricted role. Tenders resulted in significant fee reductions in the year of change

Auditor changes and tendering: UK interview evidence

Competitive pressures in the audit market have led to aggressive fee renegotiation and tendering by companies. This paper reviews microeconomic tender theory and finds it to be of limited value in the audit context. Content analysis of semi-structured interviews conducted with the finance directors of 12 UK listed companies which had recently tendered and/or changed auditor are used to investigate the tender/change process. Contrary to popular belief, fee levels do not necessarily dominate the decision to change auditors, rather changes within the client company, audit staffing, and auditor's professionalism and competency issues dominate. Nor is the selection of a tender "winner" generally based solely on price, as predicted by tender theory and as would be expected when the consequences of audit failure do not fall on the directors. However, consistent with economic theory, the winning bid appears frequently to be too low, resulting in attempts by auditors to subsequently increase fees and resentment by the finance director. Directors generally appear to view the audit tender as relating to not only the attest function per se, but to a larger package of services concerning the financial reporting function. The relative importance of price versus non-price competition in auditor choice is found to vary across companies. Auditor choice is influenced strongly by both economic and behavioural factors, in particular, by directors' assessment of the quality of non-attest services and the expected quality of working relationships, in addition to price and audit quality

Briefing: Auditor/company interactions in the 2007 UK regulatory environment

No abstract availabl

Auditor independence and audit risk: a reconceptualisation

The principles-based U.K. regulatory framework for auditor independence (Chartered Accountants Joint Ethics Committee 1996), which was adopted in 1997, identifies threats to independence in fact, independence in appearance, and the safeguards that control these threats. These principles are incorporated in the International Federation of Accountants (IFAC 2001) ethics framework. Drawing on six case studies of interactions involving significant accounting issues between audit engagement partners and finance directors in U.K.-listed companies, we analyze the threats and safeguards to auditor independence in fact that are relevant to the outcome of each interaction. Despite the U.K.'s comprehensive regulatory framework for independence, audit quality control, and independent inspection of firms, not all the interactions have a fully compliant outcome. Independence in fact is compromised where the safeguards in the framework are insufficient defense against the threats, particularly regarding intimidation and bullying during the audit process. Further examples of existing threats are identified and additional threats emerge, in particular an urgency threat, and a loss of face threat. Management motivation is found to be a key driver of pressure. Threats to independence arising within audit firms are not recognized in the current U.K. audit risk model. An extended risk model incorporating within-firm risk is suggested. This study demonstrates the need for continual improvement to regulatory frameworks; in particular it supports the recent U.S. Securities and Exchange Commission (SEC) rule on improper influence on the conduct of audits (Securities and Exchange Commission 2003a)

A methodology for analysing and evaluating narratives in annual reports: a comprehensive descriptive profile and metrics for disclosure quality attributes

There is a consensus that the business reporting model needs to expand to serve the changing information needs of the market and provide the information required for enhanced corporate transparency and accountability. Worldwide, regulators view narrative disclosures as the key to achieving the desired step-change in the quality of corporate reporting. In recent years, accounting researchers have increasingly focused their efforts on investigating disclosure and it is now recognised that there is an urgent need to develop disclosure metrics to facilitate research into voluntary disclosure and quality [Core, J. E. (2001). A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(3), 441–456]. This paper responds to this call and contributes in two principal ways. First, the paper introduces to the academic literature a comprehensive four-dimensional framework for the holistic content analysis of accounting narratives and presents a computer-assisted methodology for implementing this framework. This procedure provides a rich descriptive profile of a company's narrative disclosures based on the coding of topic and three type attributes. Second, the paper explores the complex concept of quality, and the problematic nature of quality measurement. It makes a preliminary attempt to identify some of the attributes of quality (such as relative amount of disclosure and topic spread), suggests observable proxies for these and offers a tentative summary measure of disclosure quality

A grounded theory model of auditor-client negotiations

The central research question addressed in this paper is 'How do companies and their auditors resolve important audit issues?' In-depth interviews are conducted with the audit partners and finance directors of a varied group of six major UK listed companies who had recently experienced audit interactions involving 22 significant accounting issues. A grounded theory model is developed of the negotiation process and the factors that influence the nature of the outcome of interactions. This model identifies, as principal analytical categories, a range of general relationship factors and specific accounting issue factors that influence aspects of the negotiation process. These aspects include the parties involved, the strategies adopted, the quality of the financial reporting outcome and the ease with which it is achieved. A secondary outcome of the research is that distinct categories of audit engagement partner are identified, termed the crusader, the safe pair of hands, the accommodator and the truster

The relation between the true and observed fractal dimensions of turbulent clouds

Observations of interstellar gas clouds are typically limited to two-dimensional (2D) projections of the intrinsically three-dimensional (3D) structure of the clouds. In this study, we present a novel method for relating the 2D projected fractal dimension ($\mathcal{D}_{\text{p}}$) to the 3D fractal dimension ($\mathcal{D}_{\text{3D}}$) of turbulent clouds. We do this by computing the fractal dimension of clouds over two orders of magnitude in turbulent Mach number $(\mathcal{M} = 1-100)$, corresponding to seven orders of magnitude in spatial scales within the clouds. This provides us with the data to create a new empirical relation between $\mathcal{D}_{\text{p}}$ and $\mathcal{D}_{\text{3D}}$. The proposed relation is $\mathcal{D}_{\text{3D}}(\mathcal{D}_{\text{p}}) = \Omega_1 erfc ( \xi_1 erfc^{-1}[ (\mathcal{D}_{\text{p}} - \mathcal{D}_{\text{p,min}})/\Omega_2 ] + \xi_2 ) + \mathcal{D}_{\text{3D,min}}$, where the minimum 3D fractal dimension, $\mathcal{D}_{\text{3D,min}} = 2.06 \pm 0.35$, the minimum projected fractal dimension, $\mathcal{D}_{\text{p,min}} = 1.55 \pm 0.13$, $\Omega_1 = 0.47 \pm 0.18$, $\Omega_2 = 0.22 \pm 0.07$, $\xi_1 = 0.80 \pm 0.18$ and $\xi_2 = 0.26 \pm 0.19$. The minimum 3D fractal dimension, $\mathcal{D}_{\text{3D,min}} = 2.06 \pm 0.35$, indicates that in the high $\mathcal{M}$ limit the 3D clouds are dominated by planar shocks. The relation between $\mathcal{D}_{\text{p}}$ and $\mathcal{D}_{\text{3D}}$ of molecular clouds may be a useful tool for those who are seeking to understand the 3D structures of molecular clouds, purely based upon 2D projected data and shows promise for relating the physics of the turbulent clouds to the fractal dimension.Comment: 14 pages, 7 figures. Accepted 2019 May 1