An economic analysis of competitive bidding for public sector audit engagements

How Do Regulatory Reforms to Enhance Auditor Independence Work in Practice?

“…Our investigation reveals considerable differences in audit fee schedules, supporting the observations of Beck and Barefield in a government procurement setting. While the nonincumbent auditors proposed absorption of transition costs, the incumbent Auditor 1 highlighted “significant hidden costs in auditor transition.” The nonincumbents expected that the incumbent could not deviate much from the prior year's publicly disclosed fee.…”

How Do Regulatory Reforms to Enhance Auditor Independence Work in Practice?

“…Our investigation reveals considerable differences in audit fee schedules, supporting the observations of Beck and Barefield in a government procurement setting. While the nonincumbent auditors proposed absorption of transition costs, the incumbent Auditor 1 highlighted “significant hidden costs in auditor transition.” The nonincumbents expected that the incumbent could not deviate much from the prior year's publicly disclosed fee.…”

Information Asymmetry and Competitive Bidding in Auditing

“…In the auditing literature, evidence supporting this assertion is provided by Beck and Barefield (1986), Copley and Doucet (1993), and Johnstone et al (2004. 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.…”

The Effect of Competitive Bidding on Engagement Planning and Pricing*

“…A limitation of using planned effort, mentioned by an anonymous reviewer, is that the planned level may not actually be produced during the engagement. Similarly, Beck and Barefield (1986) note the possibility of deliberate overstatement of planned effort by firms in the bidding process. However, our interest is in the composition of the bid, not in the ultimate effort performed on the engagement.…”

“…Elitzur and Falk (1996) provide a theoretical model showing that low-balling is more likely when an auction for audit services is competitive, and conclude that audit quality might decline correspondingly. Beck and Barefield (1986) show that the winning bidder in a public sector auction for audit services had both the lowest bid price and the lowest estimated hours of competing firms. In an experimental market, Schatzberg and Sevcik (1994) find that low-balling of initial engagements and subsequent quasi-rents can impair auditor independence, with negative implications for audit quality.…”

How Do Regulatory Reforms to Enhance Auditor Independence Work in Practice?

“…Our investigation reveals considerable differences in audit fee schedules, supporting the observations of Beck and Barefield in a government procurement setting. While the nonincumbent auditors proposed absorption of transition costs, the incumbent Auditor 1 highlighted “significant hidden costs in auditor transition.” The nonincumbents expected that the incumbent could not deviate much from the prior year's publicly disclosed fee.…”

Information Asymmetry and Competitive Bidding in Auditing

“…In the auditing literature, evidence supporting this assertion is provided by Beck and Barefield (1986), Copley and Doucet (1993), and Johnstone et al (2004. 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.…”

The Effect of Competitive Bidding on Engagement Planning and Pricing*

“…A limitation of using planned effort, mentioned by an anonymous reviewer, is that the planned level may not actually be produced during the engagement. Similarly, Beck and Barefield (1986) note the possibility of deliberate overstatement of planned effort by firms in the bidding process. However, our interest is in the composition of the bid, not in the ultimate effort performed on the engagement.…”

“…Elitzur and Falk (1996) provide a theoretical model showing that low-balling is more likely when an auction for audit services is competitive, and conclude that audit quality might decline correspondingly. Beck and Barefield (1986) show that the winning bidder in a public sector auction for audit services had both the lowest bid price and the lowest estimated hours of competing firms. In an experimental market, Schatzberg and Sevcik (1994) find that low-balling of initial engagements and subsequent quasi-rents can impair auditor independence, with negative implications for audit quality.…”

How Do Regulatory Reforms to Enhance Auditor Independence Work in Practice?

“…Our investigation reveals considerable differences in audit fee schedules, supporting the observations of Beck and Barefield in a government procurement setting. While the nonincumbent auditors proposed absorption of transition costs, the incumbent Auditor 1 highlighted “significant hidden costs in auditor transition.” The nonincumbents expected that the incumbent could not deviate much from the prior year's publicly disclosed fee.…”

Information Asymmetry and Competitive Bidding in Auditing

“…In the auditing literature, evidence supporting this assertion is provided by Beck and Barefield (1986), Copley and Doucet (1993), and Johnstone et al (2004. 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.…”

The Effect of Competitive Bidding on Engagement Planning and Pricing*

“…A limitation of using planned effort, mentioned by an anonymous reviewer, is that the planned level may not actually be produced during the engagement. Similarly, Beck and Barefield (1986) note the possibility of deliberate overstatement of planned effort by firms in the bidding process. However, our interest is in the composition of the bid, not in the ultimate effort performed on the engagement.…”

“…Elitzur and Falk (1996) provide a theoretical model showing that low-balling is more likely when an auction for audit services is competitive, and conclude that audit quality might decline correspondingly. Beck and Barefield (1986) show that the winning bidder in a public sector auction for audit services had both the lowest bid price and the lowest estimated hours of competing firms. In an experimental market, Schatzberg and Sevcik (1994) find that low-balling of initial engagements and subsequent quasi-rents can impair auditor independence, with negative implications for audit quality.…”