Auditor changes and tendering

Abstract

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...

Internal corporate governance mechanisms and audit quality: Evidence from GCC region

“…If this is the case, the result could lead to accept the prediction of integrating economic theory (agency theory) and behavioral theories (managerial grid theory and attraction-selectionattrition) as a better proxy for the board of directors effectiveness perceived by client firms to reduce the agency conflicts by enhancing the effectiveness of behavioral and monitoring functions and providing advice (Agrawal and Knoeber, 1996;Cai et al, 2009;Ward et al, 2009). Therefore, this result gives support to the argument of Beattie and Fearnley (1998) that auditor change is based heavily on the economic theory (agency theory) ignoring the behavioral issues of audit clients which, consequently, a partial explanation is only provided concerning audit change behavior.…”

“…Moreover, Clarkson and Simunic (1994) reported that the existing theory does not provide sufficient insight to identify either the complete set of endogenous variables that are jointly and simultaneously determined with audit quality, or the exogenous variables which underlie them. In addition, it is difficult to categorize the potential determinants influencing auditor choice based on the underlying theories because of the incompleteness of the underlying theories related to auditor choice; the overlapping of the theories with each other; and the ignorance of behavioral issues related to auditor choice (Beattie and Fearnley, 1998). Consistent with this, Meyer (2006) indicated that theories based on Western countries may be unsuitable for, and irrelevant to, other countries.…”

“…Consistent with this, Meyer (2006) indicated that theories based on Western countries may be unsuitable for, and irrelevant to, other countries. Beattie and Fearnley (1998) indicated that the theory of auditor change is based heavily on economic theory (agency theory), ignoring the behavioral issues of audit clients that undoubtedly have a significant impact on business ethics. Therefore, economic theory can provide only a partial explanation, and is not sufficient to explain audit change behavior.…”

Behind the Audit Report: A Descriptive Study of Discussions and Negotiations Between Auditors and Directors

“…This supports the findings of Beattie and Fearnley (1998a, p.20 and pp.24-25) who find that companies seek from their auditor guidance on accounting principles, comfort on internal controls and general business advice. Moreover, Beattie and Fearnley (1998b) report that where the auditor 'didn't give...sufficient or accurate advice' they were replaced (p.83). Thus, the mixing of audit and advice services is not a new phenomenon, contrary to the impression conveyed by recent contributions to the audit independence debate.…”

Strategic Decision Behavior and Audit Quality of Big and Small Audit Firms in a Tendering Process

“…Second, a request for bids is sent to possible audit firms. Hereafter, a brief meeting with the CFO and (possibly) a company visit take place before the potential auditors present their offers to the audit committee or the full board of the company in the third step (Beattie and Fearnley, 1998b). After the presentations, the client has to evaluate the offers (fourth step) and has to decide which audit firm is chosen in the last step.…”