Academic journal article International Journal of Business Studies

Choice Criteria of Listed Australian Public Companies for Selecting an Auditor: An Exploratory Study

Academic journal article International Journal of Business Studies

Choice Criteria of Listed Australian Public Companies for Selecting an Auditor: An Exploratory Study

Article excerpt

The purpose of this research is to determine the choice criteria companies use in the auditor selection process for listed Australian public companies. This is the first Australian study to investigate this issue. The study drawn on international literature and attempts to develop a more comprehensive study of these characteristics that minimise the limitations identified in these overseas studies. Eight constructs were identified from the literature and then empirically tested in a national survey. Factor analysis was used to analyse the data resulting in the establishment of nine choice criteria. The two most important choice criteria identified are Technical Competence and Client Orientation. Literature suggests that companies incur direct and indirect costs associated within an auditor change and such costs may impact on the importance of selection decision choice criteria. A comparison between companies that selected a new auditor and those that re-appointed the incumbent audit firm, suggests that seven of these choice criteria are of equal importance for the selection and re-appointment decisions. However, the results suggest that the other two criteria (Level of Audit Fee, and Effective Preparation and Communication of Audit Submission) are significantly more important to companies appointing a new auditor. The perceived difference in importance of these criteria on the selection decision process identified has implications for audit firms attempting to retain or obtain an audit appointment. These findings also should interest corporate and academic accountants***.

Keywords: Choice criteria; Auditor selection; Listed companies

I. INTRODUCTION

Companies that are required to have their financial statements audited are faced annually with the problem of deciding whether to re-appoint their incumbent auditor or appoint a new auditor. While the appointment of a new auditor should involve formal organisational process comprising an audit committee and or a competitive tender, the re-appointment of an auditor may involve either a similar formal organisational process or an informal process1. It is possible that the same choice criteria may be considered in the decision-making process where either the new auditor selection or incumbent auditor reappointment is the outcome. However, no evidence is available from the Australian audit market to support this assumption2.

Furthermore, Sands and Huang (2002) cited Australian situations where the company incurs both direct costs and indirect costs when a decision is made to switch auditors3. This evidence suggests that the decision to appoint a new auditor results in a company incurring higher direct and indirect costs. Therefore, while it is possible that the same choice criteria may be considered in the decision-making process, the importance placed in such criteria by companies may differ in a new auditor appointment decision-making process compared to the auditor reappointment decision-making process. Beattie and Fearnley (1998a, p. 29) stated that identifying "...which issues are really deemed of sufficient importance to justify the effort and cost incurred in changing auditors..." was their motivation for conducting an analysis based on a dichotomy of companies that appointed a new auditor and companies that reappointed the incumbent auditor. Determining the choice criteria companies use in the process of evaluating auditing services provided by professional accounting firms and any significant difference in the importance in these criteria between decision-making process should be of interest to corporate, practising and academic accountants4.

To date only a limited number of studies have attempted to view separately the auditor change and auditor selection decisions and focus their study on the auditor selection decision, e.g., Eichenseher and Shields (1983); Beattie, and Fearnley (1993, 1995, 1998a). These studies have used a single-item scale for each criteria and this practice, according to Roberts (1999), may cause participants to misinterpret or misunderstand the reason or criteria. …

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