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Auditor Preference

Author

Listed:
  • Karl Hackenbrack

    (Vanderbilt University)

  • Mikhael Shor

    (University of Connecticut)

Abstract

We analyze theoretically and empirically the effect of preference policies, which favor some auditors over others for reasons unrelated to the audit. For example, an auditee may prefer minority-owned auditors, all else equal. We construct an analytical model of the competitive bidding process for audit services. We show that preference policies can sometimes improve the audit procurement process by encouraging price concessions from non-preferenced auditors. We test model predictions in a setting amenable to empirical identification of preference; many municipalities prefer local firms over more distant firms. We find strong evidence of local preference, with local firms earning a 13 percent fee premium over non-local firms. We show that audit fees depend not only on the winning firm's capabilities but also crucially on the winning firm's incremental capabilities over the next best alternative. Lastly, we identify conditions under which preference policies benefit audit procurement outcomes. JEL Classification: M42, D44, M48, H83 Key words: audit markets, auditor selection, competitive bidding, local preference

Suggested Citation

  • Karl Hackenbrack & Mikhael Shor, 2012. "Auditor Preference," Working papers 2012-20, University of Connecticut, Department of Economics.
    • Handle: RePEc:uct:uconnp:2012-20
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    References listed on IDEAS

    as
    1. Sattar A. Mansi & William F. Maxwell & Darius P. Miller, 2004. "Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market," Journal of Accounting Research, Wiley Blackwell, vol. 42(4), pages 755-793, September.
    2. Burguet Roberto & Perry Martin K, 2007. "Bribery and Favoritism by Auctioneers in Sealed-Bid Auctions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-27, June.
    3. Vlad Mares & Mikhael Shor, 2008. "Industry concentration in common value auctions: theory and evidence," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(1), pages 37-56, April.
    4. Mougeot, Michel & Naegelen, Florence, 2005. "A political economy analysis of preferential public procurement policies," European Journal of Political Economy, Elsevier, vol. 21(2), pages 483-501, June.
    5. Plum, M, 1992. "Characterization and Computation of Nash-Equilibria for Auctions with Incomplete Information," International Journal of Game Theory, Springer;Game Theory Society, vol. 20(4), pages 393-418.
    6. Todd Kaplan & Shmuel Zamir, 2012. "Asymmetric first-price auctions with uniform distributions: analytic solutions to the general case," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(2), pages 269-302, June.
    7. Roberto Burguet & Martin K. Perry, 2009. "Preferred suppliers in auction markets," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 283-295, June.
    8. Cantillon, Estelle, 2008. "The effect of bidders' asymmetries on expected revenue in auctions," Games and Economic Behavior, Elsevier, vol. 62(1), pages 1-25, January.
    9. Tim Pearson & Greg Trompeter, 1994. "Competition in the Market for Audit Services: The Effect of Supplier Concentration on Audit Fees," Contemporary Accounting Research, John Wiley & Sons, vol. 11(1), pages 115-135, June.
    10. repec:hal:journl:hal-02501107 is not listed on IDEAS
    11. Ettredge, M & Greenberg, R, 1990. "Determinants Of Fee Cutting On Initial Audit Engagements," Journal of Accounting Research, Wiley Blackwell, vol. 28(1), pages 198-210.
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    More about this item

    Keywords

    audit markets; auditor selection; competitive bidding; local preference;
    All these keywords.

    JEL classification:

    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration

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