Acknowledgments:We would like to thank the P D Leake trust (a charity associated with the Centre for Business Performance of the Institute of Chartered Accountants in England and Wales) for funding this project on stakeholder reporting and user needs. The present paper forms part of the first stage of this project, which is to document company practices. A Methodology for Analysing and Evaluating Narratives in Annual Reports: A Comprehensive Descriptive Profile and Metrics for Disclosure Quality Attributes ABSTRACTThere 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, 2001). This paper responds to this call and contributes in two principal ways. First, the paper introduces to the academic literature a comprehensive fourdimensional 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.

The reality and perception of auditor independence is fundamental to public confidence in financial reporting. A new Independence Standards Board was set up in the U.S. in 1997 and the European Union (EU) is currently seeking to establish a common core of independence principles (EC Green Paper 1996). This paper explores, using a questionnaire instrument, U.K. interested parties' perceptions of the influence on auditor independence of a large set of 58 economic and regulatory factors. Forty-six factors have a significant impact on independence perceptions for all groups (finance directors, audit partners, and financial journalists). The principal threat factors relate to economic dependence and non-audit service provision, while the principal enhancement factor is the existence of an audit committee. Exploratory factor analysis reduces the factor set to a smaller number of uncorrelated underlying dimensions. Perceptions regarding many independence factors are found to be contingent upon characteristics of the respondents' ongoing audit relationships (in particular, audit firm type and company size).

bstract-This paper explores the importance of audit firm characteristics and the factors motivating auditor change based on questionnaire responses from 210 listed UK companies (a response rate of 70%). Twenty-nine potentially desirable auditor characteristics are identified from the extant literature and their importance elicited. Exploratory factor analysis reduces these variables to eight uncorrelated underlying dimensions: reputation/quality; acceptability to third parties; value for money; ability to provide non-audit services; small audit firm; specialist industry knowledge; non-Big Six large audit firm; and geographical proximity. Insights into the nature of'the Big Six factor" emerge. Two thirds of companies had recently considered changing auditors; the main reasons cited being audit fee level, dissatisfaction with audit quality and changes in top management. Of those companies that considered change, 73% did not actually do so, the main reasons cited being fee reduction by the incumbent and avoidance of disruption. Thus audit fee levels are both a key precipitator of change and a key factor in retaining the status quo.

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This paper presents direct evidence concerning the extent, nature, and outcome of interactions between the two primary parties in the auditor-client relationship -finance directors (FDs) and audit engagement partners (AEPs). A questionnaire instrument is used to elicit the frequency with which, over a three year period, an extensive set of 46 audit and audit-related issues is discussed, is negotiated, and results in a change to either the accounting numbers or disclosures. Three hundred FDs and 307 AEPs of listed UK companies are surveyed, with response rates of 51% and 80%, respectively. Principal findings are that: (i) compliance issues dominate discussions, while accounting and fee issues dominate negotiations; (ii) audit committees generally reduce the level of negotiation and increase the level of discussion, suggesting that the overall degree of confrontation declines; and (iii) in the majority of cases (57%), negotiation results in a change to the financial statements, providing evidence of the auditor's influence on the financial statements.Keywords: audit; audit committees; audit process; conflict; discussion; interaction; negotiation; relationship. SUMMARYThis paper represents the first stage of an investigation into the interaction that takes place between the two primary parties in the auditorclient relationship -finance directors (FDs) and audit engagement partners (AEPs). While the existence of discussion and negotiation has been anecdotally reported, no systematic evidence exists as to the extent, nature and outcome of this interaction. The theory in the literature creates an abstracted reality (a black box) that does not adequately describe what is actually happening. This paper seeks to begin to fill this void, by exploring the scope of interactions using a static, questionnaire approach. A questionnaire instrument is used to elicit the frequency with which, over a three year period, an extensive set of 46 audit and audit-related issues is discussed, is negotiated, and results in a change to either the accounting numbers or disclosures. Three hundred FDs and 307 AEPs of listed UK companies are surveyed, with response rates of 51% and 80%, respectively. The Int. J. Audit. 4: 177-202 (2000) large sample size allows us to generalise our findings to the population as a whole. The level of interaction activity is characterised as 'high'. Four issues are discussed by more than 50% of FD respondents and 12 issues are discussed by more than 50% of AEP respondents. By comparison, two issues are negotiated by more than 20% of FD respondents and eight issues are negotiated by more than 20% of AEP

England, 2001 (ISBN 0333747844, 309 C xxii pp. £45) With the auditing profession under the political microscope as never before, this book could not have been published at a more appropriate time. The book presents evidence of many unseen aspects of the auditor-client relationship, with two main themes emerging, 'earnings quality' and auditor independence. The work's original contribution takes the form of (lightly) edited transcripts of interviews with the Finance Directors and audit engagement partners of six UK public-listed companies and insightful analyses of the contexts, characters and issues involved. The interviewees had been selected because they had admitted to experiencing auditor-client interactions over significant accounting issues. The sort of evidence produced in the concluding part of the book is badly needed as it provides some balance to the highly charged debate following the Enron collapse. In such an environment, there is a real high risk that politicians, institutes and even accounting firms will favour knee-jerk reactions that will prove not only expensive but also ineffective in the long term. This book, which is introduced by Sir David Tweedie and which has been written by three academics respected for their appreciation of practical issues, deserves a place on the shelves of every auditing trainer/lecturer.The first part of the book contains three chapters setting the scene. The first outlines the regulatory environment, the second identifies a number of factors in the auditor-client relationship and the third describes the questionnaire used by the authors to obtain the views of directors and auditors on the frequency with which 46 audit and audit-related issues are the subject of inter-party contention.The second part of the book contains the case study material from the interviews themselves. The section begins with an introduction to the nature of inter-party negotiation before describing how the sample companies were selected, and then going on to present a brief overview of the cases and matters of contention. Each case study is awarded a separate chapter.It is difficult to summarise the nearly 200 pages of transcripts and discussion since such a wide range of issues, contexts, characters and outcomes is covered. For example, on the 'buyer type', that is, Finance Director, side of the business equation, four categories are identified, ranging from the 'grudger' who sees little value in the audit to the 'resource-seeker' who wants to get the most out of the audit. On the seller, that is, audit partner, side, the range goes from 'crusader' (perhaps an unfortunate choice of label in the context of current cultural sensitivities) with a high degree of professionalism to the 'truster' who is not sufficiently skeptical.However, the third section of the book attempts not just to summarise but to theorise about the auditor-client interaction by analysing the outcome of negotiations as a function of the quality of the auditor-auditee relationship and of the ease of obtaining agreement...

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 financial support of the Research Board of the Institute of Chartered Accountants in England and Wales is gratefully acknowledged. This paper has benefited greatly from the comments of Bill McInnes and two anonymous referees. AAAJ 11,1 74Literature review Tender theory forms part of the microeconomic analysis of auctions and bidding [3]. As a mechanism for effecting trades, auctions are an alternative to both posted prices and individual bargaining, with posted prices being suitable for standardized items. In practice, a combination of both bidding and bargaining over specifications are often employed in trades. Three basic types of auction are in use: "English" (open outcry, ascending bid), "Dutch" (open outcry, descending bid) and highest-price sealed bid.A basic bidding model concerns the standard sealed-price auction where the lowest bid wins and where the bidders have no observably different characteristics (i.e., a symmetric auction). It is assumed that the bids made by competitors are statistically independent and that their distribution can be estimated from history (i.e., there is no unobserved common factor affecting all of the competitors' bids), and the bidder knows the amount that it will cost him to complete the contract (i.e., each bidder can ignore the others' information in forming their cost estimates). These assumptions are known as the independence and private values assumptions respectively. If b i is the bid of the ith bidder and c is the cost of completing the contract, then it can be shown that expected profit is P(b i ≤ b)(b i -c), i.e., the probability that a bid of b i beats all other bids times the profits. In competitive bidding, b i should be selected to maximize this expression (Milgrom, 1989, p. 4). In symmetric environments, all types of auction described above are efficient and lead to the same expected revenues for the seller and expected profit for the bidder (Milgrom, 1989, pp. 9-10 and p. 16).It is usual, however, for the actual costs of completing the contract to be a random variable, C, i.e. for the private values assumption to be invalid. An important result of bidding theory which emerges in this case is a phenomenon known as the winner's curse which describes the situation where the winner's bid is, on average, too low. To illustrate, assume for the sake of simplicity that C is common to all bidders who each make independent estimates of C. Although the estimation errors are independent, the estimates themselves are not. Moreover, although each estimate remains unbiased, the lowest estimate is biased downward. Provided all bidders determine their bids by adding a markup which is positively related to cost, the winning bidder will be the one with the lowest estimate of costs and the winner's cost estimate will, on average, be too low (Milgrom, 1989, pp. 4-5). The implications of this are twofold. First, to make a profit it is necessary to mark up bids for both the underestimation of costs on the contracts won and a profit margin. Second, the returns in competitive bid...