The Pros And Cons Of Tendering And Audit Quality

Competitive Tendering and Audit Quality
The UK Competition and Markets Authority(CMA) implemented a compulsory Order in September 2014 for the purpose of improving audit independence. This essay will discuss whether the order will improve audit quality by answering several questions from two perspectives, academic research and auditing theory. The questions include the meaning of ‘audit quality ', opinions for and against mandatory rotation, the advantages and disadvantages of competitive tendering. The CMA 's viewpoint will also be discussed.

In latest years, some orders were issued by the Financial Reporting Council (The Audit Quality Framework, 2008), the International Auditing and Assurance Standards Board (A Framework for Audit Quality,
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Compared to mandatory rotation, it has benefits and disadvantages. The advantages will be discussed first. The competition may be fiercer, because the client companies face more choices of audit firm in the tendering. As a result, the audit fee will decrease. In the UK, during 1992 to 1994, the real audit fee of the top 100 publicly traded companies fell because of the obvious increasing competition (Accountancy, 1992; Accountancy Age, 1994). The process of tendering is less costly than rotation. In the USA, Maher, Tiessen, Colson&Broman (1992) noticed that, by controlling changes in company structure, size, risks and complexity, the auditor fees decreased from 1977 to 1981. The audit quality of incumbent auditors will increase, because they want to maintain the occupation in the tendering in order to earn more audit fees. If they cannot provide evidence to prove the good quality of their jobs, they will be changed, and it has bad influence on the reputation of the audit firm. Finally, competitive tendering give the client company more rights to decide which audit firm is the most appropriate one. On the other hand, since the tendering has considerable threshold, smaller firms may not be able to enter the market. The Big 4 firms ' dominance may be strengthened (Peston 2013). Moreover, the auditor tender process can be a sham process. (FRC,

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