AAAJ
11,1
72
Auditor changes and tendering
UK interview evidence
Vivien Beattie
Department of Accountancy and Finance, University of Stirling, UK,
and
Stella Fearnley
Department of Accounting and Management Science, University of
Portsmouth, UK
“I am appointed by the Queen and that gives me a great deal of comfort” (Sir John Bourn,
Comptroller and Auditor General)
Introduction
Significant changes in the auditing environment world-wide have, in recent
years, led to important changes in the behaviour of market participants. The
main environmental changes have been the world-wide recession, dating from
approximately 1989, which led to overcapacity on the supply side of the market.
These changing competitive pressures resulted in aggressive fee renegotiation
and competitive tendering of audit services by companies (see, for example,
Beattie and Fearnley (1994) for the UK; and Lawson (1993) for Australia).
Moizer (1994) specifically identifies tendering as a means by which
independence is threatened: “the use of the tender process will enable the
management to claim that the auditor was replaced because a cheaper one was
found and not for any reasons of dispute between the company and the audit
firm” (p. 20). There have been reports of, and evidence concerning, significant
audit fee discounting (see, for example, Accountancy (1992) and Accountancy
Age (26 May 1994) for the UK; Hancock (1993a) for South Africa; IAB (1993a)
for Italy; and IAB (1993b) for Denmark; Johnson (1994) for Australia; and Maher
et al. (1992) for the USA), lowballing (see, for example, Hancock (1993b) for
Italy; LaFrentere and Carr (1991a) for Australia; LaFrentere and Carr (1991b) for
Canada; and Pong and Whittington (1994) and Financial Times (18 May 1995)
for the UK), and suggestions of cross-subsidization of audit costs from non-
audit services (NAS) provided by audit firms (Peel and Brinn, 1993). In
combination, these behavioral responses have produced an increase in the
incidence of tendering and in the overall rate of auditor change. For example,
Beattie and Fearnley (1994) estimate that the incidence of tendering by UK
listed companies which had/had not changed auditor during the period 1987 to
Accounting Auditing &
Accountability Journal,
Vol. 11 No. 1, 1998, pp. 72-98.
© MCB University Press, 0951-3574
Received March 1996
Revised October 1996
Accepted February
1997
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.