Auditing provides an important role supporting the function of financial
markets where information asymmetry exists between shareholders and
management. The audit market for the largest publicly listed UK companies,
those within the FTSE 350, has however come under scrutiny following a number
of financial scandals and, driven both by quality and competition concerns as the
largest audit firms, the “Big 4” are dominant. Auditor tenure and long periods
without competitive tenders have been recurrent concerns and yet how
companies select their auditors is under researched.
This study examines the influences on the complex decision process
underlying auditor selection in FTSE 350 companies during an important period,
namely that between the acquisition of Arthur Andersen by Deloitte in August
2002 and the introduction of the September 2012 UK Corporate Governance
Code by the Financial Reporting Council.
Based on a social constructionist philosophical perspective and adopting a
grounded approach, the study covers 60 auditor selection decisions (over half of
those identified in the research period) and includes in depth interviews over a
period of two years with those who had recently been involved in a FTSE 350
auditor selection process; both from the buy-side and the sales-side.
A conceptual model is developed which illustrates five factor groups that
this research identified as influencing auditor selection in typically
comprehensive proposal processes. These were: Relationships at the start of the
proposal process, Service design, Capabilities and competences of the bidding
firms, Behavioural influences during the proposal process and Final decision
making. It also identifies interrelationships between these factor groups.
These results are important because they inform theory and practice at a
time when auditor change is becoming a statutory requirement. The study also
has implications for other complex purchases of intangible services, particularly
other professional services, and potentially for complex decision situations more
generally