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Accounting Research JournalEmerald Article: Auditor appointment
in compulsory audit tenderingKym Butcher, Graeme Harrison, Jill
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Auditor appointment incompulsory audit tendering
Kym ButcherSchool of Accounting, University of Western Sydney,
Sydney, Australia
Graeme Harrison and Jill McKinnonDepartment of Accounting and
Finance, Macquarie University, Sydney,
Australia, and
Philip RossSchool of Accounting, University of Western Sydney,
Sydney, Australia
Abstract
Purpose The purpose of this paper is to examine what auditor and
audit environmental attributesaffect auditor appointment decisions
in compulsory audit tendering, and whether the attributesaffecting
appointment of a new auditor (rotation) are consistent with or
different from those affectingreappointment of the incumbent
(retention).
Design/methodology/approach New South Wales (NSW) local council
finance managers weresurveyed for importance ratings of 48
attributes. An hypothesis for differential ratings betweenrotators
and retainers was formulated. Confirmatory factor analysis, tests
of mean differences andlogistic regression were used.
Findings Consistent with the samples high retention rate, the
most important attributes for allrespondents related to the quality
of previous experience with the incumbent. Consistent
withhypothesis, attributes proxying for a quality auditor
(technical competence, independence andreputation) were more
important for rotators.
Research limitations/implications The authors proxied
rotation/retention by intention. Giventhe importance of audit
quality attributes in the appointment decision and the high
retention rate incompulsory audit tendering, future research could
examine the relation between audit service qualityattributes and
retention.
Originality/value This is the first study to examine attributes
affecting auditor appointmentdecisions in a mandatory choice
setting. NSW local councils provide a unique opportunity to do so
as itis one of few jurisdictions in which compulsory audit
tendering operates. Compulsory tendering maybe implemented if
current legislation aimed at improving audit independence and
quality throughmandatory partner rotation proves infeasible.
Keywords Australia, Compulsory audit tendering, Auditor
appointment, Auditor choice,Auditor rotation, Auditor retention,
Local government audit, Auditors
Paper type Research paper
The current issue and full text archive of this journal is
available at
www.emeraldinsight.com/1030-9616.htm
Associate Professor Jill McKinnon died in June 2008. Her
co-authors acknowledge her invaluablecontribution to this paper and
the research leading thereto. The authors also acknowledge
thehelpful comments of Neil Fargher, Russell Craig, Renee Radich,
Ken Trotman, Lawrence Abbott,David Hay, Alicia Jiang and two
anonymous reviewers. The authors are grateful for the supportof
this research by the NSW Division of Local Government, Department
of Premier and Cabinet,the Local Government Managers Australia NSW,
Local Government Finance Professionals, theLocal Government
Internal Audit Network NSW and the Chief Financial
Officers/FinanceManagers of NSW local councils.
ARJ24,2
104
Accounting Research JournalVol. 24 No. 2, 2011pp. 104-149q
Emerald Group Publishing Limited1030-9616DOI
10.1108/10309611111163682
-
1. IntroductionCompulsory audit tendering was introduced to
local government in the Australianstate of New South Wales (NSW)
through The Local Government Act in 1993 (NSWGovernment, 1993) as
the means of external auditor procurement for local councils.The
Act mandates that NSW local councils call open tenders for audit
services everysix years for the following (guaranteed) six-year
tenure period, with the incumbentauditor eligible to reapply.
Councils are not required to accept the lowest bid, and both
price and service qualityfactors are taken into account (Boon et
al., 2005). Tenderers submit a joint price and qualityplan and must
trade-off between the chance of failing an undefined quality
threshold andthe need to keep costs down to outbid other tenderers
whose plans pass the undefinedquality test (Boon et al., 2005;
Cripps and Ireland, 1994)[1]. If the incumbent reapplies,councils
choose between the incumbent and other audit firm tender
applicants. If theincumbent does not reapply, councils choose a new
auditor from the tenderers.
The purpose of this study is twofold. First, we provide
descriptive evidence on whatauditor and audit environmental
attributes affect auditor appointment decisions in thecontext of
compulsory audit tendering. Second, we examine whether the
attributes thataffect the appointment of a new auditor (a rotation
decision) are consistent with, or differentfrom, those that affect
the reappointment of the incumbent auditor (a retention
decision).
The first motivation for the study is that few studies have
examined auditorappointment in a mandated context, with the
majority of prior studies focusing on thevoluntary context (Sands
and McPhail, 2003; Beattie and Fearnley, 1995; Deloitte,Haskins and
Sells, 1978). All the limited mandated auditor choice studies have
takenadvantage of the collapse of former Big 5 firm Arthur Andersen
to examine theinfluence of (predominantly) demand-side attributes
on the forced selection of a newauditor by Andersens clients (Nagy,
2005; Blouin et al., 2007; Bewley et al., 2008;De Martinis et al.,
2009). However, while, demand-side characteristics are likely to
beinfluential in the type and size of audit firm selected (Beattie
and Fearnley, 1998a;Woo and Koh, 2001), Sands and Huang (2002)
argue that supply-side characteristicsare the key influence in the
auditor replacement decision. Hence, this study willcontribute to
the auditor choice literature by examining the influence of
supply-sideattributes on the auditor appointment decision in a
mandated setting.
Compulsory audit tendering provides a unique opportunity to
examine attributesaffecting auditor appointment in a mandated
tendering context. Attributes influencingappointment in a voluntary
regime may not be generalizable to a compulsory regimebecause an
entitys need to make a decision (a forced decision) is different
from anentitys desire to make a decision (a voluntary decision)
(Nagy, 2005).
Under a voluntary regime, appointment decisions are desired in
that entities areunlikely to incur the cost of tendering for audit
services unless they are dissatisfiedwith their incumbent auditor,
and are predisposed to changing auditors(Lorentzen, 1992). That is,
a decision is made voluntarily to terminate the incumbentauditor,
usually due to dissatisfaction or intent to change, and tenders for
auditservices are called, with the incumbent having a lower
likelihood of being retained(Beattie and Fearnley, 1998a, b;
Johnson, 1993).
Under a mandated (compulsory) regime, such as that for NSW
localcouncils, auditor appointment is a needed decision in that, as
noted previously, it isa legislative requirement that councils
tender for audit services every six years.
Auditorappointment
105
-
That is, the incumbent auditor is mandatorily terminated every
six years and adecision made to reappoint the incumbent (if the
incumbent reapplies), or to appoint anew auditor for the next
six-year guaranteed tenure period. In a mandated regime,councils
may be predisposed to either retaining or changing their incumbent
leadingup to the tender, based on the quality of their experience
with the incumbent during thepreceding tenure period. Empirical
evidence suggests that if the incumbent reapplies,there is a high
probability of retention (Boon et al., 2005).
A different predisposition to changing auditors prior to
tendering suggests that auditorattributes are likely to be
differentially important in the auditor selection decision under
avoluntary versus mandated tendering regime. This study will
contribute to the auditorchoice literature by examining whether
attributes relevant to auditor appointment in amandated (needed)
context are consistent with, or different from, those
consideredimportant in auditor appointment decisions in a voluntary
(desired) context.
The second motivation is that while compulsory audit tendering
has been proposedas a way to improve auditor independence and audit
quality, there is little empiricalevidence on the consequences of
compulsory tendering. Understanding thoseconsequences is important
because, following the independence concerns surroundingthe
corporate collapses in the early 2000s (e.g. Enron and WorldCom in
the USA and HIHand One.Tel in Australia), CPA Australia called for
the introduction of compulsory audittendering every five years to
the private sector audit market (Buffini, 2002).
Current legislation in Australia (the Corporate Law Economic
Reform Program 9,CLERP 9 (Commonwealth of Australia, 2004, 2006))
and the Sarbanes-Oxley Act, 2002in the USA provide for compulsory
audit partner rotation every five years. However,research has
suggested that compulsory partner rotation might not prove
feasible,particularly in the Australian audit services market for
small audit firms, firms innon-major cities, and industry
specialist firms, because of the limited number of auditpartners
available to meet the legislative requirement (Ryken et al.,
2007)[2], [3].If mandatory partner rotation proves inadequate or
infeasible, compulsory audittendering is an alternative, motivating
the need for empirical research into theconsequences of compulsory
audit tendering for auditor appointment decisions and itslikely
effect on independence and audit quality[4].
The study contributes to the audit regulation literature
generally by providingevidence on potential consequences of
compulsory audit tendering for auditorappointment decisions. The
study has specific implications for the regulators of,
andprofessional support bodies associated with, NSW local councils,
such as the LocalGovernment Managers Australia NSW. This
association is a non-regulatory body thatprovides support to local
council managers, and issued councils with a sample
tenderspecification when compulsory audit tendering was introduced
in 1993. Thespecification details nine categories of auditor
attributes that councils should considerin an auditor selection
decision[5].
However, the extent to which the specification is relevant and
useful in local councildecisions is unknown. This is because, while
the specification details the attributescouncils should take into
account, it is a guide only, and descriptions in audit tenders
areincomplete, imprecise and open to a variety of interpretations
(Boon et al., 2005).How councils interpret and weight these
attributes is unknown as the specification wasestablished in 1993
and has not been re-examined for its relevance to councils in
practice.Hence, the findings of this study will inform regulators
on revisions that may be needed
ARJ24,2
106
-
to make the specification more contemporarily relevant. Our
findings also haveimplications for audit firms tendering to local
councils. Tendering is costly and our resultsallow firms to direct
tenders towards those attributes of most importance to
councils[6].
We survey NSW local council finance managers for their perceived
importanceratings of 48 auditor and audit environmental attributes
in auditor appointmentdecisions. The attributes are based on the
auditor appointment literature and on thesample tender
specification provided to councils to guide appointment
decisions.The specification itself is not sufficient to supply the
attributes for examinationbecause it is incomplete and may
potentially not contain attributes consideredimportant by local
councils.
We find that the most important attributes across all
respondents relate to thequality of previous experience with the
incumbent audit firm (specifically, the overallquality of audit
services provided by the audit firm, the quality of advice to
councilmanagement, and the ability of the audit partner(s) to meet
deadlines). The importanceof these attributes is consistent with
the composition of the sample which had a highrate of retention of
the incumbent auditor. Also important across the total sample
areaudit firm reputation, independence, and experience in
conducting local governmentaudits and audits generally.
With regard to differences in attributes that affect the
appointment of a new auditorversus reappointment of an incumbent,
we find that attributes proxying for a qualityauditor, specifically
technical competence, independence and audit firm reputation,are
more important for rotators than retainers. This is consistent with
our hypothesis.
2. Literature, theory and hypothesis development2.1 Prior
literatureThe majority of prior auditor choice research focuses on
auditor appointment ina voluntary auditor procurement context. This
literature examines the importance ofa wide variety of client
(demand-side), auditor (supply-side) or audit environmental(audit
engagement) attributes on two decisions; a decision to reappoint
the incumbentauditor (a retention decision) or a decision to
appoint a new auditor (a rotation decision)(Hermanson et al.,
1994)[7]. Attributes relevant to both decisions are
interrelated(Hermanson et al., 1994; Beattie and Fearnley, 1995)
but the relative importance ofattributes is likely to vary across
decisions (Beattie and Fearnley, 1995; Rummel et al.,1999; Stanny
et al., 2000; Sands and Huang, 2002: Sands and McPhail, 2003).
Auditor rotation is typically seen as involving both change and
selection decisions(Eichenseher and Shields, 1983; Francis and
Wilson, 1988; Beattie and Fearnley, 1998b;Sands and Huang, 2002;
Sankaraguruswamy and Whisenant, 2004). That is, a decisionis made
first to change audit firm, and then subsequently a new firm is
selected[8].In the mandated setting of compulsory audit tendering,
the change decision hasoccurred during the six-year period leading
to the tender. Hence, councils approach thetender with a
predisposition to change or retain their incumbent audit firms.
Wetherefore focus on the selection decision only, and specifically,
on the appointment of anew auditor or reappointment of the
incumbent.
Studies that have examined attributes relevant to appointment of
a new orreappointment of an incumbent auditor have included a
multitude of attributes, with themajor finding that technical
competence is the most important in appointment decisions(Addams
and Allred, 2002; Beattie and Fearnley, 1995; Deloitte, Haskins and
Sells, 1978).
Auditorappointment
107
-
Several studies have focused on attributes differentially
affecting appointment of a newauditor compared to retention of the
incumbent. The majority of these studies arepractitioner based
(Stanny et al., 2000; Rummel et al., 1999; Gabhart and Miller,
1984)with Sands and McPhails (2003) academic study being a notable
exception.
In relation to the appointment of a new auditor, the
practitioner-based studies findexpertise to be the most important,
whilst Sands and McPhail (2003) found that auditfee and effective
preparation and communication of the audit submission were
moreimportant to rotators[9]. In relation to reappointment of the
incumbent, no commonattributes emerge. Rather, the
practitioner-based studies find a range of attributesrelevant to
experience with the incumbent to be important, including data
processingcapabilities and the ability of the partner to
communicate effectively (Gabhart andMiller, 1984), staff
personalities and meeting deadlines (Rummel et al., 1999),
andoverall quality of services (Stanny et al., 2000).
2.2 Theory and hypothesis developmentWe develop an hypothesis
for the second purpose of our paper which is to examinewhether
there is a difference in the perceived importance of attributes
affectingappointment of a new auditor (a rotation decision) versus
those affecting thereappointment of the incumbent (a retention
decision). We hypothesize that there willbe a difference in
attributes affecting rotation and retention decisions because ofa
difference in the predisposition to change audit firm leading up to
the compulsory tender.
In a voluntary audit tendering context, clients are likely to be
predisposed tochanging their audit firm (Lorentzen, 1992). By
contrast in the mandated context(of NSW local councils), councils
will approach the appointment decision at the time ofcompulsory
tender with either a predisposition to change or retain their
incumbent,based on dissatisfaction or satisfaction with the quality
of the audit services providedby the incumbent developed during the
six-year tenure period. The guaranteed tenureperiod affects
councils predisposition in that:
. should a new auditor prove unsatisfactory, the council is
locked-in for thesix-year period; and
. the costs of training a new auditor are likely to be high
given the complex natureof council activities, duties and
compliance requirements.
Councils will likely be predisposed to retaining their incumbent
auditor if theincumbent reapplies and the council is satisfied with
the quality of services providedduring their tenure (Rummel et al.,
1999; Pandit, 1999; Stanny et al., 2000). Councils willlikely be
predisposed to appointing a new auditor if the incumbent does not
reapply,or reapplies but the council is dissatisfied with the
quality of the audit servicesprovided (Burton and Roberts, 1967;
Bedingfield and Loeb, 1974; Williams, 1988;Beattie and Fearnley,
1995; Behn et al., 1997).
In this mandated context, we expect that the majority of
councils will bepredisposed to retaining their incumbent. This is
for two reasons. First, Boon et al.(2008) found that NSW local
councils are generally satisfied with the quality of auditservices
provided by their incumbent auditors. Second, Boon et al. (2005)
provideevidence of high retention rates in NSW local government,
with 59 percent and75 percent of councils retaining their auditors
at the first and second mandated tendersin 1995 and 2001 (and 86
percent at the third tender in 2007). This contrasts with
ARJ24,2
108
-
the low retention rates of 18 and 17 percent, respectively,
found in Beattie andFearnleys (1998a) and Johnsons (1993) voluntary
audit tendering studies.
Beattie and Fearnley (1995) found that the two most frequently
stated reasonsfor considering auditor change were the level of
audit fee and dissatisfaction with thequality of the incumbent. In
a voluntary tendering context, fee considerations are likely tobe
more important than quality considerations, with Beattie and
Fearnley (1998a, b) notingthe concern by regulators and academics
that the tendering process would be used as afee-minimization
strategy, hence compromising auditor independence and audit
quality.In the mandated context of NSW local government, however,
quality considerations arelikely to be more important than the
level of fees. This is because, as Boon et al. (2005)show, audit
fees for all local councils decreased by 40 percent at the time of
introduction ofcompulsory tendering in 1993, and have remained at
that lower level. Hence, fees are notexpected to be important in
auditor appointment decisions in our study.
We hypothesize that councils predisposed to change their auditor
because ofdissatisfaction with the incumbent will likely rotate
towards a quality auditor(Boon et al., 2005). These councils have
no direct experience with the quality ofprospective new auditors,
and, hence, must use proxies for audit quality determinablefrom the
tender submissions or other publicly available sources. That is,
they must relyon attributes observable ex ante about the quality of
prospective auditors.
In terms of observable proxies for audit quality ex ante, the
definition of audit qualityis an initial reference point. DeAngelo
(1981a) defined audit quality as comprisingcompetence (the
probability that the auditor will discover a breach or
misstatement) andindependence (the probability that the auditor
will report the breach or misstatement).Herrbach (2001) defined
audit quality similarly as technical quality (competence)
andprofessional behaviour (independence). Moizer (1997, p. 63)
argued that reputation(image or brand-name) was also an important
observable ex ante proxy for audit quality.
Consistent with DeAngelo (1981a), Herrbach (2001) and Moizer
(1997), we contendthat the best observable ex ante proxies for
audit quality are technical competence,independence, and audit firm
reputation. We hypothesize that councils predisposed torotate
auditors at compulsory tender will rate these proxies for quality
as moreimportant in their auditor appointment decisions compared to
councils predisposed toretain their incumbent.
Technical competence is important because a client, here a local
council, needs to haveconsiderable confidence in the technical
skill set of the partners, managers and staffprofessionals in order
to choose a firm (Addams and Allred, 2002, p. 63).
Technicalcompetence comprises technical qualifications, audit
experience generally and auditexpertise at both the audit firm and
audit team (individual) level. Consistent with Ghoshand Moons
(2005) distinction of audit experience and audit expertise,
experience is definedas expert knowledge gained through years of
on-the-job experience (Ashton, 1991), whileexpertise relates to
industry-specific experience (or specialization) (Velury et al.,
2003).Expertise allows auditors to identify and address
industry-specific issues and problemsmore comprehensively and,
hence, obtain an advantage relative to auditors withoutindustry
knowledge (Chaney et al., 1997; Velury et al., 2003).
Audit independence is defined as independence in fact and in
appearance(Richard, 2006). Independence in fact refers to attitudes
of impartiality and objectivity,while independence in appearance
refers to perceptions by third parties that the auditor
Auditorappointment
109
-
is capable of maintaining impartiality and capacity of judgment,
and resistingpressures from client management (Richard, 2006, p.
156).
Auditor reputation (image or brand-name) is important because,
in the absence ofusers ability to assess quality directly, audit
firms with a well-known (unfamiliar)reputation are regarded as
providing a higher (lower) quality audit (Moizer, 1997).Reputation
provides information on service quality, and also represents a bond
that theaudit firm dissipates if it fails to supply the
contracted-for quality (Healy and Lys,1986), the consequences of
which are potential loss of reputation, audit fees and clientbase
(DeAngelo, 1981b; Francis and Wilson, 1988; Bedard et al., 2000;
Citron andManalis, 2001; Chaney et al., 2004).
In addition, with respect to independence and reputation, NSW
local councils haveaccountability and stewardship relationships
with the state government andcommunity as the councils
stakeholders. Councils, therefore, are likely to valueperceptions
of independence and an auditors reputation as a means of enhancing
theirown reputation in the eyes of stakeholders (Healy and Lys,
1986).
Thus, we hypothesize that councils predisposed to rotate
auditors at compulsoryaudit tender will seek to align themselves
with a quality auditor where a qualityauditor is proxied by ex ante
observable characteristics of technical competence,independence and
reputation:
H1. Councils predisposed to rotate auditors at compulsory audit
tender will ratetechnical competence, independence and reputation
as more important in theauditor appointment decision compared to
councils predisposed to retain theirincumbent auditor.
3. Method3.1 Variable identificationA review of the auditor
choice literature, specifically the multi-attribute studies
thatfocus on auditor appointment from a behavioural perspective,
and the sample tenderspecification provided to local councils by
the Local Government Managers AustraliaNSW, identified a number of
auditor (supply-side) and audit environmental (auditengagement)
attributes for inclusion in the survey[10].
Table I details a taxonomy of 48 attributes identified from the
literature and thesample tender specification which were used in
constructing the surveyquestionnaire[11]. The 48 attributes were
categorized theoretically and nine broadcategories were identified.
These were four supply-side (auditor) attributes of audit
firmreputation, location, ability to provide non-audit services and
technical competence; andfive audit environmental characteristics
of the audit plan, audit fee, independence,relationships with the
incumbent audit firm and tender documents/process.
These nine categories are labeled attribute groupings level 1 in
column 2 ofTable I. These attribute groupings are used in the
hypothesis development andconfirmatory factor analysis. Column 3
classifies each level 1 attribute grouping intosub-groupings
(labeled attribute groupings level 2), while column 4 details
theindividual items that fall within each level 2 grouping (labeled
attribute groupingslevel 3 survey items). These individual items
are used in the survey questionnaire.Column 5 shows each items
question number in the questionnaire[12]. The last columnshows the
references from which the attributes and survey items were
developed.
ARJ24,2
110
-
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995)
,Ad
dam
san
dD
avis
(199
6),R
um
meletal.
(199
9),S
tan
nyetal.
(200
0),
Ad
dam
san
dA
llre
d(2
002)
,S
ank
arag
uru
swam
yan
dW
his
enan
t(2
004)
,ten
der
spec
ifica
tion
Rep
uta
tion
ot
her
clie
nts
Det
ails
ofm
ajor
aud
itcl
ien
tsof
the
aud
itfi
rm47
Del
oitt
e,H
ask
ins
and
Sel
ls(1
978)
,G
eorg
ean
dS
olom
on(1
980)
,Gab
har
tan
dM
ille
r(1
984)
,Sco
ttan
dv
and
erW
alt
(199
4),
Bea
ttie
and
Fea
rnle
y(1
995)
,S
ank
arag
uru
swam
yan
dW
his
enan
t(2
004)
,te
nd
ersp
ecifi
cati
onR
epu
tati
on
size
Th
eau
dit
firm
isa
smal
lin
tern
atio
nal
orn
atio
nal
aud
itfi
rmT
he
aud
itfi
rmis
ala
rge
loca
lor
reg
ion
alau
dit
firm
Th
eau
dit
firm
isa
smal
llo
cal
aud
itfi
rmT
he
aud
itfi
rmis
aB
ig4
inte
rnat
ion
alau
dit
firm
5
40 414
Bar
lev
(197
7),
Geo
rge
and
Sol
omon
(198
0),
Eic
hen
seh
eran
dS
hie
lds
(198
3),
Cas
abon
aan
dB
arb
era
(198
7),A
dd
ams
and
Dav
is(1
994)
,Sco
ttan
dv
and
erW
alt
(199
4),
Bea
ttie
and
Fea
rnle
y(1
995)
,Ad
dam
san
dD
avis
(199
6),R
um
meletal.
(199
9),
Sta
nn
yetal.
(200
0),
Ad
dam
san
dA
llre
d(2
002)
,S
ank
arag
uru
swam
yan
dW
his
enan
t(2
004)
(continued
)
Table I.Literature summary and
taxonomy of attributes
Auditorappointment
111
-
Att
rib
ute
char
acte
rist
icA
ttri
bu
teg
rou
pin
gs
lev
el1
Att
rib
ute
gro
up
ing
sle
vel
2A
ttri
bu
teg
rou
pin
gs
lev
el3
su
rvey
item
sA
ttri
bu
ten
um
ber
Att
rib
ute
sou
rce
from
lite
ratu
rean
dsa
mp
lete
nd
ersp
ecifi
cati
on
Loc
atio
nL
ocat
ion
Th
eau
dit
firm
has
anof
fice
incl
ose
pro
xim
ity
toth
eco
un
cil
7D
eloi
tte,
Has
kin
san
dS
ells
(197
8),
Geo
rge
and
Sol
omon
(198
0),
Eic
hen
seh
eran
dS
hie
lds
(198
3),
Cas
abon
aan
dB
arb
era
(198
7),
Ad
dam
san
dD
avis
(199
4,19
96),
Bea
ttie
and
Fea
rnle
y(1
995,
1998
b),
Ru
mm
eletal.
(199
9),S
tan
nyetal.
(200
0),
Ad
dam
san
dA
llre
d(2
002)
,S
and
san
dH
uan
g(2
002)
,S
and
san
dM
cPh
ail
(200
3),
San
kar
agu
rusw
amy
and
Wh
isen
ant
(200
4)A
bil
ity
top
rov
ide
NA
SN
AS
op
erat
ion
alT
he
cap
abil
ity
ofth
eau
dit
firm
top
rov
ide
non
-au
dit
serv
ices
such
asop
erat
ion
alau
dit
san
d/o
rco
nsu
ltin
gse
rvic
es
3B
arle
v(1
977)
,Del
oitt
e,H
ask
ins
and
Sel
ls(1
978)
,G
eorg
ean
dS
olom
on(1
980)
,E
ich
ense
her
and
Sh
ield
s(1
983)
,G
abh
art
and
Mil
ler
(198
4),
Cas
abon
aan
dB
arb
era
(198
7),
Ad
dam
san
dD
avis
(199
4,19
96),
Sco
ttan
dv
and
erW
alt
(199
4),B
eatt
iean
dF
earn
ley
(199
5),R
um
meletal.
(199
9),
Sta
nn
yetal.
(200
0),
Ad
dam
san
dA
llre
d(2
002)
,S
and
san
dH
uan
g(2
002)
,S
and
san
dM
cPh
ail
(200
3),
ten
der
spec
ifica
tion
NA
S
gen
eral
lyT
ech
nic
alco
mp
eten
ceT
ech
nic
alco
mp
eten
ce
qu
alifi
cati
ons
Th
ete
chn
ical
qu
alifi
cati
ons
ofth
ep
rop
osed
aud
iten
gag
emen
tp
artn
er(s
)T
he
tech
nic
alq
ual
ifica
tion
sof
the
pro
pos
edau
dit
team
man
ager
(s)
10 11
Del
oitt
e,H
ask
ins
and
Sel
ls(1
978)
,E
ich
ense
her
and
Sh
ield
s(1
983)
,B
eatt
iean
dF
earn
ley
(199
5),
Ad
dam
san
dD
avis
(199
6),
Sta
nn
yetal.
(200
0),
Ad
dam
san
dA
llre
d(2
002)
,S
and
san
dM
cPh
ail
(200
3),
ten
der
spec
ifica
tion
Th
ete
chn
ical
qu
alifi
cati
ons
ofth
ep
rop
osed
aud
itte
amsu
per
vis
or(s
)12
Tec
hn
ical
com
pet
ence
ex
per
ien
ceT
he
exp
erie
nce
ofth
ep
rop
osed
aud
iten
gag
emen
tp
artn
er(s
)in
con
du
ctin
gau
dit
sg
ener
ally
20D
eloi
tte,
Has
kin
san
dS
ells
(197
8),
Eic
hen
seh
eran
dS
hie
lds
(198
3),
Gab
har
tan
dM
ille
r(1
984)
,C
asab
ona
and
Bar
ber
a(1
987)
,S
and
san
dM
cPh
ail
(200
3),
ten
der
spec
ifica
tion
Th
eex
per
ien
ceof
the
pro
pos
edau
dit
man
ager
(s)
inco
nd
uct
ing
aud
its
gen
eral
ly29
Th
eex
per
ien
ceof
the
pro
pos
edau
dit
team
sup
erv
isor
(s)
inco
nd
uct
ing
aud
its
gen
eral
ly32
(continued
)
Table I.
ARJ24,2
112
-
Att
rib
ute
char
acte
rist
icA
ttri
bu
teg
rou
pin
gs
lev
el1
Att
rib
ute
gro
up
ing
sle
vel
2A
ttri
bu
teg
rou
pin
gs
lev
el3
su
rvey
item
sA
ttri
bu
ten
um
ber
Att
rib
ute
sou
rce
from
lite
ratu
rean
dsa
mp
lete
nd
ersp
ecifi
cati
on
Tec
hn
ical
com
pet
ence
ex
per
tise
aud
itfi
rmle
vel
Th
eau
dit
firm
isco
nsi
der
edto
be
asp
ecia
list
inlo
cal
gov
ern
men
tau
dit
Det
ails
ofot
her
cou
nci
lscu
rren
tly
aud
ited
by
the
aud
itfi
rm
6
44
Del
oitt
e,H
ask
ins
and
Sel
ls(1
978)
,G
eorg
ean
dS
olom
on(1
980)
,E
ich
ense
her
and
Sh
ield
s(1
983)
,G
abh
art
and
Mil
ler
(198
4),
Cas
abon
aan
dB
arb
era
(198
7),
Her
man
sonetal.
(199
4),
Sco
ttan
dv
and
erW
alt
(199
4),
Bea
ttie
and
Fea
rnle
y(1
995)
,R
um
meletal.
(199
9),
San
ds
and
Hu
ang
(200
2),
Sta
nn
yetal.
(200
0),
Ad
dam
san
dA
llre
d(2
002)
,S
and
san
dM
cPh
ail
(200
3),
San
kar
agu
rusw
amy
and
Wh
isen
ant
(200
4),
ten
der
spec
ifica
tion
Tec
hn
ical
com
pet
ence
ex
per
tise
ind
ivid
ual
lev
el
Th
eex
per
ien
ceof
the
pro
pos
edau
dit
eng
agem
ent
par
tner
(s)
inco
nd
uct
ing
loca
lg
over
nm
ent
aud
its
21D
eloi
tte,
Has
kin
san
dS
ells
(197
8),
Gab
har
tan
dM
ille
r(1
984)
,A
dd
ams
and
Dav
is(1
994,
1996
),te
nd
ersp
ecifi
cati
onT
he
exp
erie
nce
ofth
ep
rop
osed
aud
itm
anag
er(s
)in
con
du
ctin
glo
cal
gov
ern
men
tau
dit
s30
Th
eex
per
ien
ceof
the
pro
pos
edau
dit
team
sup
erv
isor
(s)
inco
nd
uct
ing
loca
lg
over
nm
ent
aud
its
33
En
vir
onm
enta
lA
ud
itp
lan
Gen
eral
Th
ed
etai
lan
dco
mp
lete
nes
sof
the
pro
pos
edau
dit
pla
n13
Gab
har
tan
dM
ille
r(1
984)
Au
dit
app
roac
h/s
trat
egy
Th
en
atu
reof
the
pro
pos
edau
dit
app
roac
h14
Cas
abon
aan
dB
arb
era
(198
7)A
ud
itte
chn
olog
y/a
ud
itst
ruct
ure
/com
pu
ter
aud
it
Th
eco
mp
ute
rau
dit
cap
abil
ity
ofth
eau
dit
firm
23D
eloi
tte,
Has
kin
san
dS
ells
(197
8),
Bea
ttie
and
Fea
rnle
y(1
995)
,te
nd
ersp
ecifi
cati
on
Au
dit
tim
ing
Th
ep
rop
osed
tim
ing
ofau
dit
wor
kin
term
sof
the
nu
mb
er,
du
rati
onan
dap
pro
xim
ate
dat
eof
vis
its
by
the
aud
itfi
rm
16C
asab
ona
and
Bar
ber
a(1
987)
,te
nd
ersp
ecifi
cati
on
Au
dit
hou
rsT
he
pro
pos
edn
um
ber
ofh
ours
toco
nd
uct
the
aud
it(f
rom
the
beg
inn
ing
offi
eld
wor
kto
the
aud
itre
por
td
ate)
15C
asab
ona
and
Bar
ber
a(1
987)
,te
nd
ersp
ecifi
cati
on
Th
ep
rop
osed
inv
olv
emen
tof
the
aud
itp
artn
er(s
)in
the
con
du
ctof
the
aud
itin
term
sof
esti
mat
edau
dit
hou
rs
22
(continued
)
Table I.
Auditorappointment
113
-
Att
rib
ute
char
acte
rist
icA
ttri
bu
teg
rou
pin
gs
lev
el1
Att
rib
ute
gro
up
ing
sle
vel
2A
ttri
bu
teg
rou
pin
gs
lev
el3
su
rvey
item
sA
ttri
bu
ten
um
ber
Att
rib
ute
sou
rce
from
lite
ratu
rean
dsa
mp
lete
nd
ersp
ecifi
cati
on
Th
ep
rop
osed
inv
olv
emen
tof
the
aud
itm
anag
er(s
)in
the
con
du
ctof
the
aud
itin
term
sof
esti
mat
edau
dit
hou
rs
31
Th
ep
rop
osed
inv
olv
emen
tof
the
aud
itte
amsu
per
vis
or(s
)in
the
con
du
ctof
the
aud
itin
term
sof
esti
mat
edau
dit
hou
rs
34
Au
dit
fee
Au
dit
fee
Th
eco
mp
etit
iven
ess
ofth
ep
rici
ng
stru
ctu
reof
the
aud
itfi
rmfo
rth
ep
rov
isio
nof
aud
itse
rvic
esT
he
aud
itfe
ees
tim
ate
pro
vid
edb
yth
eau
dit
firm
isco
mm
ensu
rate
wit
hth
eau
dit
wor
kre
qu
ired
17 18
Geo
rge
and
Sol
omon
(198
0),
Cas
abon
aan
dB
arb
era
(198
7),
Ad
dam
san
dD
avis
(199
4),
Her
man
sonetal.
(199
4),S
cott
and
van
der
Wal
t(1
994)
,B
eatt
iean
dF
earn
ley
(199
5,19
98b
),A
dd
ams
and
Dav
is(1
996)
,Ru
mm
eletal.
(199
9),
Sta
nn
yetal.
(200
0),
Ad
dam
san
dA
llre
d(2
002)
,S
and
san
dH
uan
g(2
002)
,S
and
san
dM
cPh
ail
(200
3),
San
kar
agu
rusw
amy
and
Wh
isen
ant
(200
4),
ten
der
spec
ifica
tion
Ind
epen
den
ceIn
dep
end
ence
Th
ein
dep
end
ence
ofth
eau
dit
firm
from
you
rco
un
cil
19B
arle
v(1
977)
,G
eorg
ean
dS
olom
on(1
980)
,E
ich
ense
her
and
Sh
ield
s(1
983)
,G
abh
art
and
Mil
ler
(198
4),
Cas
abon
aan
dB
arb
era
(198
7),
Ad
dam
san
dD
avis
(199
4,19
96),
Sco
ttan
dv
and
erW
alt
(199
4),
Bea
ttie
and
Fea
rnle
y(1
998b
),S
tan
nyetal.
(200
0),
Ad
dam
san
dA
llre
d(2
002)
Rel
atio
nsh
ips
wit
hth
ein
cum
ben
tau
dit
firm
Incu
mb
ent
aud
itor
Pre
vio
us
exp
erie
nce
ofth
eau
dit
firm
wit
hy
our
cou
nci
las
anin
cum
ben
tau
dit
or8
Del
oitt
e,H
ask
ins
and
Sel
ls(1
978)
,E
ich
ense
her
and
Sh
ield
s(1
983)
,G
abh
art
and
Mil
ler
(198
4),
Cas
abon
aan
dB
arb
era
(198
7),S
cott
and
van
der
Wal
t(1
994)
,B
eatt
iean
dF
earn
ley
(199
5,19
98b
),R
um
meletal.
(199
9),
Sta
nn
yetal.
(200
0),
San
ds
and
McP
hai
l(2
003)
,S
ank
arag
uru
swam
yan
dW
his
enan
t(2
004)
Qu
alit
yof
wor
kin
gre
lati
onsh
ipw
ith
aud
itp
artn
ers
27
Qu
alit
yof
wor
kin
gre
lati
onsh
ips
wit
hau
dit
eng
agem
ent
staf
f28
Th
eq
ual
ity
ofth
eau
dit
firm
sad
vic
eto
cou
nci
lm
anag
emen
t,in
clu
din
gm
anag
emen
tle
tter
s,in
tern
alco
ntr
olre
por
ts
39
Th
eov
eral
lq
ual
ity
ofse
rvic
ep
rov
ided
by
the
aud
itfi
rm38
(continued
)
Table I.
ARJ24,2
114
-
Att
rib
ute
char
acte
rist
icA
ttri
bu
teg
rou
pin
gs
lev
el1
Att
rib
ute
gro
up
ing
sle
vel
2A
ttri
bu
teg
rou
pin
gs
lev
el3
su
rvey
item
sA
ttri
bu
ten
um
ber
Att
rib
ute
sou
rce
from
lite
ratu
rean
dsa
mp
lete
nd
ersp
ecifi
cati
on
Th
eac
cess
ibil
ity
ofth
ep
artn
er-i
n-c
har
ge
ofth
een
gag
emen
t36
Th
eab
ilit
yof
the
aud
itp
artn
erto
mee
td
ead
lin
es37
Ten
der
doc
um
ents
/p
roce
ssT
end
erp
rop
osal
Th
eq
ual
ity
ofth
eau
dit
firm
sw
ritt
ente
nd
erp
rop
osal
42A
dd
ams
and
Dav
is(1
994,
1996
),B
eatt
iean
dF
earn
ley
(199
8b),
Sta
nn
yetal.
(200
0),
Ad
dam
san
dA
llre
d(2
002)
,S
and
san
dM
cPh
ail
(200
3),
San
kar
agu
rusw
amy
and
Wh
isen
ant
(200
4)
Th
eq
ual
ity
ofth
eau
dit
firm
sor
alp
rese
nta
tion
43T
he
per
son
alre
lati
onsh
ips
esta
bli
shed
bet
wee
nth
eau
dit
firm
sk
eyp
eop
lean
dco
un
cil
man
agem
ent
du
rin
gth
ete
nd
erp
roce
ss
46
Table I.
Auditorappointment
115
-
Table II presents the taxonomy used for the sensitivity
analysis. This taxonomy wasthe nine categories in the sample tender
specification:
(1) capacity-including quality and availability of
workforce;
(2) quality and depth of audit performance and experience;
(3) proposed audit plan;
(4) price;
(5) value-added services;
(6) technical expertise;
(7) referees;
(8) tender proposal process; and
(9) other.
These nine categories are shown in column 1 of Table II. Column
2 classifies eachcategory into sub-categories which column 3
describes as being either a supply-side(auditor) or environmental
(audit engagement) characteristic. Column 4 shows the orderin which
the attributes were presented in the survey, while column 5 details
thedescription of each of the 48 items used in the survey.
3.2 Survey design and administrationThe survey questionnaire
used closed-form questions and consisted of two sections.The first
asked respondents to rate the importance of the 48 attributes using
aseven-point Likert-type scale with anchors ranging from minus
three (veryunimportant) to plus three (very important), with a
neutral response (zero) being themid-point of the scale[13].
Similar to Beattie and Fearnley (1995), questions were framed as
a generic task and noreference was made to the councils incumbent
auditor. Respondents were asked to assumethat tenders for audit
services had been called by their council and they were involved
inselecting an auditor (either reappointing the incumbent or
appointing a new auditor).Respondents were asked to what extent
each auditor attribute is important in yourauditor appointment
decision. The order of the 48 attributes was randomized both
withinand across attribute groupings to overcome potential bias of
demand characteristics orhalo effect. Some similar items were
grouped together (e.g. items concerning the auditpartner) to avoid
the respondent having to change mind-sets too often.
The second section of the questionnaire contained demographic
questions:. the length of time the respondent had been in the
position of finance manager;. council size in terms of population
and revenue;. whether the council was metropolitan or
non-metropolitan;. the type of incumbent audit firm;. the length of
the incumbent auditors tenure; and. the report type of the councils
last audit (modified or unmodified).
Respondents were also asked the number of bids that would be
expected if their councilwere calling for tenders at the time of
the survey, and their preferred outcome
ARJ24,2
116
-
Cat
egor
yas
per
ten
der
spec
ifica
tion
Su
b-c
ateg
ory
Att
rib
ute
clas
sifi
cati
on
Su
rvey
attr
ibu
ten
o.S
urv
eyat
trib
ute
des
crip
tion
Cap
acit
y
incl
ud
ing
qu
alit
yan
dav
aila
bil
ity
ofw
ork
forc
e
Tec
hn
ical
qu
alifi
cati
ons
Su
pp
ly-s
ide
10T
he
tech
nic
alq
ual
ifica
tion
sof
the
aud
iten
gag
emen
tp
artn
er(s
)11
Th
ete
chn
ical
qu
alifi
cati
ons
ofth
eau
dit
team
man
ager
(s)
12T
he
tech
nic
alq
ual
ifica
tion
sof
the
aud
itte
amsu
per
vis
or(s
)A
vai
lab
ilit
y
pro
pos
edin
vol
vem
ent
ofau
dit
team
En
vir
onm
enta
l22
Th
ep
rop
osed
inv
olv
emen
tof
the
aud
itp
artn
er(s
)in
the
con
du
ctof
the
aud
itin
term
sof
esti
mat
edau
dit
hou
rs31
Th
ep
rop
osed
inv
olv
emen
tof
the
aud
itm
anag
er(s
)in
the
con
du
ctof
the
aud
itin
term
sof
esti
mat
edau
dit
hou
rs34
Th
ep
rop
osed
inv
olv
emen
tof
the
aud
itte
amsu
per
vis
or(s
)in
the
con
du
ctof
the
aud
itin
term
sof
esti
mat
edau
dit
hou
rsQ
ual
ity
and
dep
thof
aud
itp
erfo
rman
cean
dex
per
ien
ce
Pri
orex
per
ien
cew
ith
aud
itfi
rmE
nv
iron
men
tal
8P
rev
iou
sex
per
ien
ceof
the
aud
itfi
rmw
ith
you
rco
un
cila
sin
cum
ben
tau
dit
orD
epth
ofau
dit
exp
erie
nce
fi
rm47
Det
ails
ofm
ajor
aud
itcl
ien
tsof
the
aud
itfi
rm
Dep
thof
aud
itex
per
ien
ce
team
20T
he
exp
erie
nce
ofth
eau
dit
eng
agem
ent
par
tner
(s)
inco
nd
uct
ing
aud
its
gen
eral
lyQ
ual
ity
ofp
erfo
rman
ceof
aud
itfi
rman
d/o
rst
aff
29T
he
exp
erie
nce
ofth
eau
dit
man
ager
(s)
inco
nd
uct
ing
aud
its
gen
eral
ly32
Th
eex
per
ien
ceof
the
aud
itte
amsu
per
vis
or(s
)in
con
du
ctin
gau
dit
sg
ener
ally
38T
he
over
all
qu
alit
yof
aud
itse
rvic
esp
rov
ided
by
the
aud
itfi
rm39
Th
eq
ual
ity
ofth
eau
dit
firm
sad
vic
eto
cou
nci
lm
anag
emen
t,in
clu
din
gm
anag
emen
tle
tter
s,in
tern
alco
ntr
olre
por
ts37
Th
eab
ilit
yof
the
aud
itp
artn
er(s
)to
mee
td
ead
lin
esP
rop
osed
aud
itp
lan
Gen
eral
aud
itp
lan
En
vir
onm
enta
l13
Th
ed
etai
lan
dco
mp
lete
nes
sof
the
pro
pos
edau
dit
pla
nA
ud
itap
pro
ach
/st
rate
gy
14T
he
nat
ure
ofth
ep
rop
osed
aud
itap
pro
ach
Au
dit
hou
rs15
Th
ep
rop
osed
nu
mb
erof
hou
rsto
con
du
ctth
eau
dit
(fro
mth
eb
egin
nin
gof
fiel
dw
ork
toth
eau
dit
rep
ort
dat
e)
(continued
)
Table II.Taxonomy of attributes
classified according to thesample tender
specification
Auditorappointment
117
-
Cat
egor
yas
per
ten
der
spec
ifica
tion
Su
b-c
ateg
ory
Att
rib
ute
clas
sifi
cati
on
Su
rvey
attr
ibu
ten
o.S
urv
eyat
trib
ute
des
crip
tion
Au
dit
tim
ing
Com
pu
ter
aud
itca
pab
ilit
y
16T
he
pro
pos
edti
min
gof
aud
itw
ork
inte
rms
ofth
en
um
ber
,du
rati
onan
dap
pro
xim
ate
dat
eof
vis
its
by
the
aud
itfi
rm23
Th
eco
mp
ute
rau
dit
cap
abil
ity
ofth
eau
dit
firm
Pri
ceC
omp
etit
iven
ess
ofau
dit
fee
En
vir
onm
enta
l17
Th
eco
mp
etit
iven
ess
ofth
ep
rici
ng
stru
ctu
reof
the
aud
itfi
rmfo
rth
ep
rov
isio
nof
aud
itse
rvic
esA
ud
itfe
eco
mm
ensu
rate
wit
ha
qu
alit
yau
dit
18T
he
aud
itfe
ees
tim
ate
pro
vid
edb
yth
eau
dit
firm
isco
mm
ensu
rate
wit
hth
eau
dit
wor
kre
qu
ired
Val
ue-
add
edse
rvic
esN
on-a
ud
itse
rvic
esS
up
ply
-sid
e3
Th
eca
pab
ilit
yof
the
aud
itfi
rmto
pro
vid
en
on-a
ud
itse
rvic
essu
chas
oper
atio
nal
aud
its
and
/or
con
sult
ing
serv
ices
Qu
alit
yof
wor
kin
gre
lati
onsh
ips
En
vir
onm
enta
l27
Qu
alit
yof
wor
kin
gre
lati
onsh
ipw
ith
the
aud
itp
artn
er(s
)28
Qu
alit
yof
wor
kin
gre
lati
onsh
ips
wit
hth
eau
dit
eng
agem
ent
staf
f36
Th
eac
cess
ibil
ity
ofth
ep
artn
er(s
)-in
-ch
arg
eof
the
eng
agem
ent
Tec
hn
ical
exp
erti
seE
xp
erti
se
firm
Su
pp
ly-s
ide
6T
he
aud
itfi
rmis
con
sid
ered
tob
ea
spec
iali
stin
loca
lg
over
nm
ent
aud
it44
Det
ails
ofot
her
cou
nci
lscu
rren
tly
aud
ited
by
the
aud
itfi
rmE
xp
erti
se
team
21T
he
exp
erie
nce
ofth
eau
dit
eng
agem
ent
par
tner
(s)
inco
nd
uct
ing
loca
lg
over
nm
ent
aud
its
30T
he
exp
erie
nce
ofth
eau
dit
man
ager
(s)
inco
nd
uct
ing
loca
lg
over
nm
ent
aud
its
33T
he
exp
erie
nce
ofth
eau
dit
team
sup
erv
isor
(s)
inco
nd
uct
ing
loca
lg
over
nm
ent
aud
its
Ref
eree
sR
efer
ence
sS
up
ply
-sid
e45
Ref
eren
ces
from
sen
ior
NS
Wlo
cal
cou
nci
lre
pre
sen
tati
ves
that
hav
eex
per
ien
cew
ith
the
aud
itfi
rm48
Ref
eren
ces
from
maj
orau
dit
clie
nts
ofth
eau
dit
firm
25T
he
aud
itfi
rmis
acce
pta
ble
toth
eco
un
cils
reg
ula
tors
Ten
der
pro
pos
alp
roce
ssT
end
erp
rop
osal
pro
cess
En
vir
onm
enta
l42
Th
eq
ual
ity
ofth
eau
dit
firm
sw
ritt
ente
nd
erp
rop
osal
43T
he
qu
alit
yof
the
aud
itfi
rms
oral
pre
sen
tati
on
(continued
)
Table II.
ARJ24,2
118
-
Cat
egor
yas
per
ten
der
spec
ifica
tion
Su
b-c
ateg
ory
Att
rib
ute
clas
sifi
cati
on
Su
rvey
attr
ibu
ten
o.S
urv
eyat
trib
ute
des
crip
tion
46T
he
per
son
alre
lati
onsh
ips
esta
bli
shed
bet
wee
nth
eau
dit
firm
sk
eyp
eop
lean
dco
un
cil
man
agem
ent
du
rin
gth
eco
urs
eof
the
ten
der
pro
pos
alp
roce
ssO
ther
Au
dit
firm
size
Su
pp
ly-s
ide
5T
he
aud
itfi
rmis
asm
all
inte
rnat
ion
alor
nat
ion
alau
dit
firm
40T
he
aud
itfi
rmis
ala
rge
loca
lor
reg
ion
alau
dit
firm
41T
he
aud
itfi
rmis
asm
all
loca
lau
dit
firm
4T
he
aud
itfi
rmis
aB
ig4
inte
rnat
ion
alau
dit
firm
Rep
uta
tion
Su
pp
ly-s
ide
1T
he
over
all
rep
uta
tion
ofth
eau
dit
firm
24T
he
aud
itfi
rmis
not
inv
olv
edin
emb
arra
ssin
gli
tig
atio
n2
Th
ere
pu
tati
onof
the
aud
itfi
rmin
pro
vid
ing
aud
itse
rvic
esto
loca
lco
un
cils
9T
he
rep
uta
tion
ofth
eau
dit
eng
agem
ent
par
tner
(s)
Non
-in
dep
end
ence
En
vir
onm
enta
l35
Bel
ief
that
the
aud
itfi
rmw
ill
giv
eth
eco
un
cil
anu
nq
ual
ified
aud
itre
por
tIn
dep
end
ence
19T
he
ind
epen
den
ceof
the
aud
itfi
rmfr
omy
our
cou
nci
lP
rofe
ssio
nal
ind
emn
ity
insu
ran
ceS
up
ply
-sid
e26
Th
eau
dit
firm
sp
rofe
ssio
nal
ind
emn
ity
insu
ran
ceco
mp
lies
wit
hth
em
inim
um
req
uir
emen
tsof
ICA
Aor
CP
AA
ust
rali
aA
ud
itfi
rmlo
cati
onS
up
ply
-sid
e7
Th
eau
dit
firm
has
anof
fice
incl
ose
pro
xim
ity
toth
eco
un
cil
Table II.
Auditorappointment
119
-
of whether the council would appoint a new audit firm or
reappoint the incumbent.Responses to this question formed the
dependent variable.
Questionnaire design and administration followed Dillmans (2000)
tailored designmethod. Three follow-ups to an initial mailing were
conducted, two by mail and one byphone. All councils were phoned
prior to the third mail-out to ask if they had respondedto the
survey[14], [15].
3.3 Sample selection and data collectionThe sample was the
population of 152 NSW local council finance managers.
Financemanagers were the appropriate respondents because they are
crucial members of thetender committee that appoints the auditor,
and they liaise closely with the externalauditors during the annual
audit of the councils financial statements.
Appendix 1 shows the demographics of the sample. NSW councils
are small inpopulation (70.7 percent have less than 50,000
residents) and revenue (66.7 percent haverevenue less than $50m),
and are largely non-metropolitan (74.8 percent). They aremostly
audited by large local or regional firms (64 councils or 52
percent). A total of79 (64.2 percent) have been audited by their
incumbent for one tender period and44 (35.8 percent) for two tender
periods. Virtually all (93.5 percent) received unmodifiedopinions
on their last audit report[16]. If tenders for audit services were
called at the timeof the survey, the majority of councils would
expect to receive between four and six bids(73 councils or 59.3
percent). The demographic data also showed 27 (22 percent)
ofcouncils would prefer to rotate their auditors and 96 (78
percent) would prefer to retaintheir incumbent. Demographics for
councils preferring to rotate and retain are shown incolumns 4 and
5, respectively. The demographics for each group essentially mirror
thosefor the total.
The data were collected in the middle of calendar year 2006,
that is, towards the endof the second compulsory tender and at the
beginning of the last year of the six-yearmandatory tenure period
(the tender period had commenced 1 July 2001 and was due toend 30
June 2007). Council finance managers, as respondents, therefore had
at least fiveyears experience with their incumbent auditors.
3.4 Response rateFrom the population of 152 finance managers,
148 (97 percent) responded.In 25 responses one or more items of
missing data were found and were deleted,meaning all analyses were
conducted on 123 responses. Aside from follow-up efforts,the high
response rate was achieved due to interest in the survey because
of:
. previous contact between the researchers and the finance
managers asparticipants at a national conference of local
government finance professionalsshortly before the survey; and
. the support of the survey by the NSW Local Government Finance
ManagersExecutive.
Given the high response rate, non-response bias is not a threat
to the validity of the results.
3.5 Method of analysisA forced confirmatory factor analysis was
conducted for each of the attributegroupings level 1 (column 2 in
Table I). Attribute groupings for location, ability
ARJ24,2
120
-
to provide NAS and independence could not be factor analysed
because they consistedof only one item. The factor analysis was
performed using the principal componentsextraction method with
Varimax (Kaiser normalisation) rotation. Each factor wasconverted
into a single factor score (following Field, 2000). The factor
scores and meansfor the single attributes of location, ability to
provide NAS and independence were thenused in a logistic regression
as predictor variables explaining intention to rotate orretain the
incumbent auditor.
Forced confirmatory factor analysis was used as it provides
factors coterminouswith the attribute grouping taxonomy developed
from the literature, and allows testingof the hypotheses.
Confirmatory factor analysis removes within-attribute
collinearity,although not between-attribute collinearity. Its
purpose is to reduce predictor variablesto a subset of uncorrelated
factors (Field, 2000, pp. 431-2).
3.6 Model specificationThe auditor choice model to be estimated
is as follows (ignoring council and timeperiod subscripts):
Intention to rotate b0 b1 Audit firm reputation b2 Location b3
Ability to provide NAS b4 Technical competence b5 Audit plan b6
Audit fee b7 Independence b8 Relationships with the incumbent audit
firm b9 Tender documents=process e
1
where:
Intention to rotate categorical dependent variable, coded one
for intention torotate, zero otherwise.
Independent variables continuous independent variables; factor
scoresderived from factor analysing attributes comprisingthe
corresponding attribute category, or attribute meanscores where the
category contained a single attribute.Single attribute categories
are location, ability toprovide NAS and independence.
The demographic data (Appendix 1) were also included in the
logistic regression ascontrols. The only control that was
significant was the number of bids, indicating thecompetitiveness
of the market. As no other control was significant, the model does
notspecify the controls and none of the results for the controls
are reported.
We used intention or preference to rotate or retain auditors as
the dependent variable.A dichotomous measure was used to reflect
the nature of the decision. The demand-sidestudies also use this
dichotomy (Woo and Koh, 2001). A measure of preferred outcome
orintention follows Pandit (1999), and is based on research that
shows intention followsattitude and precedes behaviour; and is a
commonly used approach in the behaviouralliteratures to measure the
likelihood of action (Pandit, 1999, p. 176).
The questionnaires were anonymous so we have no ability to match
intention atthe time of the survey with behaviour at the next
tender (which took place 12 months afterthe study). However, at the
subsequent tender 14 percent of councils rotated their auditors
Auditorappointment
121
-
and 86 percent retained their incumbents. These percentages are
relatively consistent withthe percentages of intending rotators (22
percent) and retainers (78 percent) in our study.
3.7 Sensitivity analysisA forced confirmatory factor analysis
was conducted for each of the nine categories inthe sample tender
specification set out in Table II, to identify a single factor for
eachcategory. principal components extraction method with Varimax
(Kaisernormalisation) rotation was used. Each factor was converted
into a single factorscore (Field, 2000). These (uncorrelated)
factor scores were then used in a logisticregression as predictor
variables explaining intention to rotate or retain the
incumbentauditor, hence facilitating tests of the hypothesis and
allowing examination of theusefulness of the sample tender
specification.
The auditor choice model to be estimated is as follows (ignoring
council and timeperiod subscripts):
Intention to rotate b0 b1 Capacity2 including quality and
availability of workforce
b2 Quality and depth of audit performance and experienceb3
Proposed audit planb4 Priceb5 Valueadded servicesb6 Technical
expertiseb7 Refereesb8 Tender proposal processb9 Other e
2
where:
Intention to rotate categorical dependent variable, coded one
for intention torotate, zero otherwise.
Independent variables continuous independent variables; factor
scores derivedfrom factor analysing attributes comprising
thecorresponding attribute category.
Consistent with the main results, the demographic data were
included in the logisticregression as controls. Again, no control
was significant other than the number of bids.Therefore, the model
does not specify controls and none of the results for controls
arereported.
4. Results4.1 DescriptivesAppendix 2 presents the importance
ratings (means, medians and standard deviations)for the 48
individual attributes on a scale of minus three (very unimportant)
to plusthree (very important). Column 3 shows the importance
ratings for the total sample.Columns 4 and 5 show the ratings for
the councils preferring to rotate and retain theirincumbent
auditor, respectively. The attributes are ranked in descending
order ofimportance for the total sample, i.e. the most important
attribute is listed first.
The three most important attributes overall (for the total
sample) relate to thecouncils relationship with their incumbent
auditors and are associated with the qualityof performance of the
audit firm and/or staff. These are:
ARJ24,2
122
-
(1) the overall quality of audit services provided by the audit
firm;
(2) the quality of the audit firms advice to council management,
includingmanagement letters and internal control reports; and
(3) the ability of the audit partner(s) to meet deadlines.
The next three items in order of importance are reputation (both
in providing auditservices to local councils and overall) and
independence. Three of the four itemscomprising the remainder of a
Top 10 relate to technical expertise and depth ofexperience of the
audit team; specifically experience of the audit manager(s)
andpartner(s) in conducting local government audits and audits
generally. One audit feeattribute (the fee is commensurate with the
audit work required) was ranked ninth.However, the other fee
attribute (the competitiveness of the pricing structure of theaudit
firm) was ranked 23rd and below other quality related
attributes.
The four attributes considered least important were all
associated with audit firmsize and type; specifically:
(1) the audit firm is a Big 4 international audit firm;
(2) the audit firm is a small international or national audit
firm;
(3) the audit firm is a small local firm; and
(4) the audit firm is a large local or regional audit
firm[17].
Also rated in the ten least important attributes were the belief
that the audit firm willgive the council an unqualified audit
report, the audit firm has an office in closeproximity to the
council, details of major audit clients of the audit firm, and
thecapability of the audit firm to provide non-audit services.
These findings provide descriptive evidence that, in the context
of compulsory audittendering, quality considerations are important
in auditor appointment decisions.Local councils value the
importance of, and are likely to appoint, audit firms that
arereputable, independent, have audit teams with technical
competence, particularly localcouncil industry expertise, and
provide quality audit services in their relationshipswith the
council. Given the predominance of retainers in the sample, these
findingssupport the premise that satisfaction with the quality of
the incumbent auditor isassociated with retention of the
incumbent.
4.2 Univariate resultsColumn 6 in Appendix 2 shows t-statistics
and significance levels for tests ofdifferences of attribute means
between councils preferring to rotate their incumbentauditor
(rotators) and councils preferring to retain (retainers). Of the 48
attributes,17 were positive and significant (six at p , 0.01 and 11
at p , 0.05) and four werepositive and marginally significant ( p ,
0.10), meaning they were more important torotators. One attribute
(the councils previous experience with the incumbent auditor)had a
negative sign (significant at p , 0.05), meaning it was more
important toretainers. The descriptive statistics suggest that
respondents intending to rotate aremore highly sensitised to the
importance of audit quality attributes overall comparedto those
intending to retain.
Table III presents the results of the confirmatory factor
analysis conductedon the nine attributes (attribute groupings level
1) in column 2 of Table I.
Auditorappointment
123
-
Att
rib
ute
no.
Att
rib
ute
des
crip
tion
Auditfirm
reputation
(100percent)
48R
efer
ence
sfr
omm
ajor
aud
itcl
ien
tsof
the
aud
itfi
rm(0
.170
)47
Det
ails
ofm
ajor
aud
itcl
ien
tsof
the
aud
itfi
rm(0
.161
)5
Th
eau
dit
firm
isa
smal
lin
tern
atio
nal
orn
atio
nal
aud
itfi
rm(0
.155
)45
Ref
eren
ces
from
sen
ior
NS
Wlo
cal
cou
nci
lre
pre
sen
tati
ves
that
hav
eex
per
ien
cew
ith
the
aud
itfi
rm(0
.147
)9
Th
ere
pu
tati
onof
the
aud
iten
gag
emen
tp
artn
er(s
)(0
.146
)41
Th
eau
dit
firm
isa
smal
llo
cal
aud
itfi
rm(0
.143
)4
Th
eau
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