Engaging Auditors: Field Investigation of a Courtship

Engaging Auditors: Field Investigation of a

Courtship

Krista Fiolleau, Kris Hoang, Karim Jamal, and Shyam Sunder

Yale SOM Faculty Research Workshop

April 14, 2010

Sunder: Engaging Auditors

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An Overview• A field investigation of the market

process for audit services• Complex courtship before engagement• Conflicting incentives• Obtained documents and conducted

interviews on RFPs by a publicly traded Canadian company, and a Canadian government organization. Find• Significant management control over auditor

selection• Asymmetry of power and information flow in

favor of client management• Auditors provide references from senior

officers of current and past clients• Auditors repeatedly demonstrate their

responsiveness and commitment to the prospective client’s management

• Extensive price competition• Implications for audit transparency, quality,

auditor risk management, expertise differentiation, auditor rotation, and corporate governance


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Information and Audit Reforms

• Regulatory reforms (e.g., mandatory rotation of auditors) may assume that relevant information is readily available—even common knowledge—to the contracting agents

• Hayek (1945): Most such information is dispersed, little incentive to reveal it to a central planner

• Individuals, markets and regulators have to acquire, aggregate and interpret the relevant information

• Information dispersal, and conflicts between private and collective interest, are “sand in the gearbox” of even well-intentioned reforms

• Before deciding on the fact and terms of engagement, auditors and their prospective clients participate in a courtship to gather information about each other

• A field examination of this process may help us better understand the consequences

• Also, possible insights into policy issues (e.g., increasing the frequency of courtship through a regulatory mandate for rotation of auditors)


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Client-Auditor Courtship• What information is sought and

gathered during the courtship? • Justification for regulation of

auditing: audit quality being opaque, the customers of audit are at an informational disadvantage

• How does a client view audit quality?

• What does the client (and board audit committee) know about the quality of audit services at the time of engagement?

• What does the auditor know about the prospective client (for selection, risk management)?


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A Case for Case Study• How do managers, the board and auditors

express their wishes, formulate responses, distinguish themselves and make distinctions to seek a preferred engagement?

• Different disciplinary approaches to the same phenomenon choose different abstractions to gain useful insights

• Case study: opposite of abstraction—rich details of complex interactions of auditors and clients (possible inputs into traditional analyses of larger datasets)

• Supplement observations with discussion and conjectures

• Detailed direct observation and analysis of a single instance of phenomena has a rich tradition in social sciences (Graham 1971, Cuban missile crisis; Downs 1967, bureaucracies)

• Importance of direct observation in an institutionalized discipline such as accounting

• Methodological portfolio: small sample studies and large sample studies


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What We Did

• Obtained access to confidential records from companies

• Client requests for proposal for audit services (RFPs), board and audit committee minutes, and executive notes

• Audit firms (bid documents submitted in response to RFPs)

• 18 interviews (client executives and bidding audit partners)

• Both RFP processes arose from mandated audit partner rotation in Canada

• Case 1: mandatory engagement partner rotation led the client to invite bids and, ultimately, to un-mandated change of audit firm.

• The audit committee chair and the CFO: availability of senior audit partners with relevant industry experience due to rotation in their own firms was a major factor

• Case 2: a government organization implemented decision to put the audit up for bid every three years

• Both cases study prestigious, profitable, growing, and successful organizations targeted by Big-4 audit firms


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Method• Approval from the research ethics board• Each participant (and firm) signed a consent form,

promised confidentiality, a copy of the written research report, and the opportunity to suggest corrections of any errors or misunderstandings

• Obtained RFPs (Client 1, >$10 Billion assets, listed on TSX with NYSE sub, regulated, financially healthy) sent to the Big-4 audit firms (Auditors 1-4) in Appendix A

• Obtained bid documents directly from all Big-4 audit firms, releases authorized by local managing partners, Auditor 1 – incumbent, Auditor 2 – winning bidder, Auditor 3, and Auditor 4.

• Interviewed the CFO and the chair of the audit committee (60-90 minutes each, generally following a standard script given to them in advance (Appendix B), recorded on audio tape and hand notes, within 6-12 months of completion of the RFP process

• After clearance from the CFO, the MDs of the four audit firms identified the proposed lead engagement partner; interviewed each proposed engagement audit partner (sometimes with the local managing partner) who oversaw the development of the bid documents; guiding script in Appendix C; taped and handwritten notes


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Method• Follow up with Client 1 to clarify our initial observations

from last four steps; obtain additional records: minutes of board and audit committee meetings on auditor selection; outline of the client’s prescribed RFP process; written correspondence between the audit committee and management; completed evaluation forms assessing the auditor bids; and management’s completed scorecard recording deliberations about each audit firm

• As a cross-check on our observations in this case, steps a-d were repeated for an audit put up for bid in a government-funded organization (Client 2: a large, complex, prestigious organization with a budget of more than $2 Billion in 2008)

• RFP to all Big-4 firms plus one national firm, received 3 Big-4 bids. Obtained bid documents from all bidders and conducted interviews with the three proposed engagement partners (sometimes local MD participated) as well as three executives from Client 2. The interview process commenced within weeks of auditor selection

• Supplemented our observations from our primary and secondary cases by obtaining additional, recent RFPs for audit services of five other organizations, together with the written bids submitted by one Big-4 audit firm on all five potential engagements (Clients 3-7). These organizations included one publicly traded company, one private company, and three public sector enterprises.

• The documents and information gathered in the study are summarized in Table 1


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Summary of Findings• Involvement of the audit committee in the

auditor selection, although management runs the process

• Management the main producer and gatherer of information and controls what, when, and how it is distributed to the audit committee and auditors

• Auditors struggle to differentiate themselves through their technical expertise

• Relationship building by auditors is critical to success in the courtship process

• This effort raises concerns about independence

• Significant differences in bids (audit fees) • Audit partner rotation can catalyze the

RFP process; rotation influenced client satisfaction with the incumbent auditor, freed up expert resources at other audit firms, and fueled auditor courtship practices.


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RFP and the Bid Process• Client 1’s RFP describes the engagement, lists auditor

selection committee members, and outlines the communication process, including deadlines for responses and page limits. Respondents required to address specific topics, including firm expertise, transition, rapport, cultural fit.

• Client 2’s RFP presents a similar but more detailed template, requiring a more rigid structure in auditor proposals

• Clients 3-7 RFPs had similar specifications. • In all cases, signing a confidentiality agreement,

auditors were invited to an information acquisition process. Clients 1 and 2 provided access to private and public documents in a “data room” and made executives available for discussion. Clients 3-7 provided less information (much smaller firms)

• Client 1’s RFP Process overview: After auditor’s information acquisition phase, the auditors submitted their written proposals. Written proposals were read, summarized, compared with pros and cons, and evaluated by management. Management (i.e., the CFO) then provided the proposals and the summary to all selection committee members. Auditors invited to give oral presentations to the selection committee. The selection committees deliberated on the proposals. The selection committee made its recommendation to the audit committee, and the audit committee then approved and submitted the recommendation to the board. The selected auditor was notified of appointment; losing firms debriefed

• Table 2 details the timeline and records of the RFP process for Client 1


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Client 1 Client 2 Clients 3-7 Type of organization

Publicly held Large Complex Industry subject to regulation

Public sector Large Complex

Includes 1 publicly held Moderate size and complexity

Request for Proposal (RFP) obtained

YES YES YES

RFP includes information available in “data room”

YES YES NO

Proposal (bid) documents obtained

Auditor 1 - Incumbent Auditor 2 – Winner Auditor 3 Auditor 4

Auditor 1 - Winner Auditor 2 – did not bid Auditor 3 – Incumbent Auditor 4

Auditor 1

Other documents obtained from management

Meeting minutes Auditor selection decision-making aids (e.g., evaluation forms and scorecard) Correspondence among management, board members and auditors

None None

Interviews with management

CFO CFO Accounting Manager Government Audit

None

Table 1:Documents and Information Gathered


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Guidelines for Analysis• One author summarized the interviews

transcripts, RFPs, and bid documents, categorizing it into broad themes.

• Two independent coders, both Canadian CAs, independently read all materials and coded them into the same summary table. Coding differences were discussed and resolved by the two independent coders.

• The five results sections of the paper discuss the elements coded in this table using the framework of the RFP to organize our observations (selection, information acquisition, expertise, relationships, and fees)

• We developed expectations of the information produced and requested in the clients’ RFP documents based on available practice guidebooks: (1) a sample request for proposal letter for CPA services from the AICPA (2004), and (2) a Canadian Big 4 audit firm guide to RFP preparation (Audit Firm 2007).

• Interviewed a Big-4 firm audit partner from the U.S. This partner had been identified by the U.S. firm as being experienced in responding to RFP’s for audit services. We use this interview to explore similarities and or differences between U.S. and Canadian practices


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1. Control of Process• The regulations (OSC, TSX, NYSE) BAC’s key

function: select and recommend the independent external auditor to the board

• AICPA: “With the passage of the Sarbanes-Oxley Act (SOX), audit committees now ‘own’ the relationship between the independent auditor and the organization”

• We expected the BAC to run the selection process

• Management Takes the Wheel• But management controlled the process,

including all communication and the flow of information to both the audit committee and the bidding firms

• The RFP was sent out to auditors by the CFO with the approval of the audit committee

• Examination of Clients 2-7 and interviews with audit partners suggests this practice of having CFOs establishing contact and controlling the interaction with prospective audit firms is currently the norm in Canada

• The process we observed is inconsistent with the “best practice” we had expected (audit committee contacts prospective audit firms, cover letter jointly signed by the CFO and audit committee chair, suggested by the AICPA guide)


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…Control of Process • Client 1: Auditor selection committee of six

managers (CEO, CFO, etc.) listed by name and position with audit committee chair plus remaining four as anonymous members

• Client 1’s VP Finance was single point of contact for auditor inquiries and site visits, no contact information provided for the audit committee chair or members; respondents prohibited from any direct contact with officers or directors of Client 1 under threat of disqualification

• The chair, (no other members) of audit committee met auditors individually for half hour each

• No meeting between the prospective auditors and the audit committee without executives present

• The CFO in follow up interviews: such a meeting would have taken place if the audit committee was dissatisfied by the selection process or management’s choice

• The AICPA guide suggests management (e.g., CEO, CFO), and the BAC chair meet prospective auditors

• The audit firm RFP guide suggests all audit committee members to meet prospective auditors

• The U.S. audit partner: impractical to require all audit committee members to be available for meetings with prospective auditors given geographical challenges. The actual practice of Client 1 is closer to that of the AICPA guide.


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…Auditor Selection• Auditors given access to a data room with public and

private client information• Executives available for interview by appointment• The auditors’ written proposals (30 pages max)

evaluated and summarized by the CFO and VP Finance. Copies of proposals and CFO’s evaluation to the selection committee

• Auditors make oral presentations to selection committee

• The selection committee discusses each presentation for half hour; each member ranks the four firms on a set of attributes listed in RFP (e.g., knowledge of business, people, relationship, organization fit, commitment, audit methodology, other services, and fees)

• Selection committee members provide additional qualitative comments on each auditor to the CFO, ask for management’s recommendation

• The CFO and VP Finance, compiled the evaluation forms, as well as a scorecard for each audit firm

• The six management members of the selection committee hold a meeting, select the top two candidates, and then examine the CFO’s summary of the pros and cons of the two finalist firms to arrive at a recommendation

• The audit committee accepted the recommendation, and forwarded it to the board and the shareholders.

• The timeline in Table 4: six-day interval for auditors presentations and the board approval of the change of auditor; BAC and board meetings held on the same day


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…Auditor Selection• Client 1 audit committee followed the letter of the

Ontario Securities Commission rule of recommending the auditor to the board, but hardly “owned” the process

• All auditors interviewed said that their level of engagement with the audit committee of Client 1 was normal; CFOs usually drive the process

• A review of RFP documents from Clients 2-7 also shows the process being coordinated by management, primarily the CFO

• The AICPA guide and Audit Firm RFP guide also recommend that management control and coordinate the flow of information, and the scheduling of interviews and meetings

• The RFP and interviews of Client 2 indicate that the audit committee’s involvement was limited to attending the “all hands meeting”, where all bidding firms asked questions of management before developing their proposals. The audit committee authorized the information that could be shared in the RFP process but did not weigh in on the selection of a new auditor.

• For Clients 3-7, one of which is publicly traded, the audit committee chair (but no other member) was involved in the selection process.


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Audit committee oversight of the courtship

• BAC’s participation limited to comfort with the process, not as decision makers

• A BAC member did not think that the committee would not have the power to reverse management’s choice of auditor

• One of the audit partners in our study lamented that the audit committee had asked management for a recommendation; felt more appropriate to ask management for its assessment, with the final decision by the audit committee

• Our field study suggests that management controls the courtship process, with the audit committee in the passenger seat. Management sets the destination, they read the auditors’ signs and signals, and the audit committee signs off at the end of the journey safely executed. The Audit Committee Chair summarized the process as follows:

• “Our AC saw its primary role as one to ensure that a robust selection process was followed by the company, where the BAC had substantive oversight, and, had the final decision. We didn't see this role as requiring, or necessarily being compatible with, the BAC actually conducting all work.”


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Information Acquisition• The RFP document outlines the information

the client wants and uses about the auditor • These specifications closely reflected the

available guidelines : experience and expertise relevant to client industry; transition and continuity plans; audit and quality control approach; dispute resolution process; fees; and references.

• Absent (although recommended by guidelines): relationships and infractions with regulators; identification of large clients lost, with reasons; and peer review reports.

• Extensive documents available to prospective auditors: annual and quarterly reports, business and strategic plans, Board and committee minutes, and investment listings

• We had expected that the auditors would be highly interested in risk related documentation made available to them by the clients.

• The auditor interviews pointed to a different approach to information acquisition.


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Management Gives a Little, Gets a Lot

• Client acquires information about the auditor• Auditor hesitates to request client for information and

submits proposal in the face of much uncertainty• The client defines the terms of audit quality, and

collects information about auditors from multiple sources to develop a clear picture of auditor

• Managers of Client 1 quite assertive in obtaining the answers they were interested in

• Wanted to know the auditors’ reasoning and process for arriving at critical accounting estimates and judgments.

• Wanted to be sure that there were no accounting policy differences between the company and the auditor, no restatements of their past reports

• Client 1’s BAC chair: “We were very concerned about making sure that they believed they knew enough of the company’s results, and the company’s transactions, to ensure that they did not view the risk of restatement as being even a low probability. We wanted to clear that outright from the start.”

• The U.S. audit partner: prior to engagement, wants to understand significant transactions and the accounting for such transactions to reduce the likelihood of a potential restatement; felt he could identify potential accounting issues by reviewing the public filings by the client and discussion to avoid surprises


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Meticulous Client, Hungry Auditor

• Client 1: any lawsuits against the auditor (distraction, reputation risk)

• Management contacted all client references, and explored informally with industry colleagues

• Management did not ask for results of Canadian Public Accountability Board (CPAB) reports, which are issued privately to registered audit firms

• Auditors bidding on Client 1 paid no attention to internal control weaknesses of the client reported in the most recent management letter from the incumbent auditors

• Interviews: many clients do not provide such information. Auditors did not investigate the details of accounting adjustments and reporting issues raised by the incumbent auditor, nor whether these items were booked or carried forward to future periods.

• Although management letters issued by the incumbent Auditor 1 for the last two years were available to them in the data room, two of the three other auditors stated that they had not read the management letters.

• Auditors showed limited interest in an assessment of the internal auditing system of Client 1, and assumed internal audit must be adequate since the company was subject to review by the industry regulator

• Auditors in both Canada and the U.S. felt that they could not ask Client 1 for certain items, such as the schedule of unadjusted errors, although they had the right to do so. Instead they asked indirect questions to try and gauge the number of items that came up for negotiation


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Private and Public Clients• Auditors did not ask to see correspondence with

the federal regulator on accounting related issues, any internal reports that had been prepared for the board and audit committee, or breakdowns of how the incumbent auditor allocated staff time

• One audit partner explained it as follows: “Company X would be such a big frog in a small pond for any of the audit firms that I can understand why they probably all had the attitude of ‘we don’t care how ugly it is, we want the brand and we want the business.’”

• Client 2 (public organization) made significantly more detailed information available to the auditors (budget breakdown of hours for each account and location, control weaknesses and management’s implementation status on improvements, and issues raising audit concerns)

• One common question-and-answer session was organized at Client 2’s office; all bidding auditors were asked to submit written questions ahead of time, and a single set of responses was provided. The auditors were reluctant to ask questions in this common forum out of fear of giving away strategic information to competitors. Instead, they relied more on examination of documents provided by management, and less on the personal contact we observed to be dominant in the case of Client 1.


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Bargaining Power Imbalance• Auditors seemed to’ lack of bargaining power vis-

à-vis management• Probing a client too deeply on sensitive issues

during courtship may generate enough antagonism to lose the hoped-for engagement

• Some aspects of auditors’ apparent lack of interest in critical information might be attributable to their prior due diligence, overall assessment of the client as being low risk, and the desirability of this client. But, they could not have known the unadjusted errors through their own independent investigations

• Auditor efforts were centered on personal meetings and conversations to understand the clients, to build a relationship, and to sell themselves

• Less attention on papers, and more on cues from interpersonal encounters with the management

• Auditors focused on assessing senior management’s candor, forthrightness, competence and integrity

• The results from interview with the U.S. audit partner was very similar to those conducted with Canadian partners.

• The proposals indicated a good understanding of how to serve the client prospectively; relying on their personal judgment from interacting with key management personnel


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Client to Auditor Feedback on RFP Process

• Interviews with the auditors: extensive knowledge about their competitors; well-informed about their competitors’ proposals and the client’s assessment of each competitor

• Some auditors even offered their opinions on the viability of competitor proposals

• A similar detailed and informative feedback process at Client 2

• In both Canada and the U.S., the bidding audit partners sought and received feedback from the client (why’s for both winners and losers)

• Unsure about the reasons for providing such debriefing by the client, and its consequences; not common in most areas of the economy

• Linked to (1) the client’s desire to gain advantage by promoting intense competition among auditors; (2) clients retaining losing firms for other professional services and gleaned additional feedback from interaction with the client outside of the formal RFP debriefing

• This level of debriefing also suggests that it is difficult for an audit firm to develop proprietary strategies or response formats. Bids from audit firms appear very similar (making it harder for audit firms to differentiate themselves) partly because of structure imposed by the client, but also as a result of common knowledge amongst firms from receiving client feedback about what features were effective and ineffective in the bid process.


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Expertise• Clients demanded auditor expertise in their RFPs • In all seven cases, auditors responded by

assembling an audit team of relationship partners, engagement partners, managers, and senior/junior audit staff

• All senior personnel, had industry specific experience spelled out in detail

• Client 1: introduced industry specialists from head office, tax partners, and the lead IT partner; dedicated 5-12 pages to staff profiles, lengthy descriptions of their industry-specific experience, firm’s industry-specific market share regionally and globally; industry-specific clients as references; all bids listed thought leadership resources in the firm (forums, websites, roundtables, e-mail alerts and industry specific publications)

• Client 2: similar approach to demonstrating auditor expertise, although emphasis on local office resources and IT qualifications, in line with the client’s needs

• These strategies consistent with common practices suggested by the U.S. audit partner: importance of demonstrating expertise through industry leadership and knowledge resources.

• RFPs demanded, and audit bids conveyed expertise


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All Auditors Look Good

• All auditors appear to be suitable prospects for the client

• Differentiation by commitment of senior personnel to Client 1 (national CEO attend the oral presentation and designated as the relationship partner; location of expertise and involvement of experts in the industry)

• Auditor 3 proposed to move a partner with industry experience, and Auditor 2 proposed to move a senior manager with industry experience for Client 1.

• The U.S. audit partner also suggested moving a partner to the head office city as a way of showing commitment.

• Client 1 valued membership of audit firm personnel on advisory committees in the relevant industry associations or regulatory advisory bodies, and all auditors responded by including team members with such credentials in their proposals, and included industry peers of Client 1 as references.

• All Big-4 bidders had the technical expertise to perform a satisfactory audit of this client and closely bunched in management and audit committee scores for industry expertise; Client 1’s CFO:

• “We all unanimously felt that every firm could do the job very well with the team they had presented.”

• The same sentiment was expressed by the selection committee of Client 2.

• During interviews, an audit partner frustrated that the standardized accounting environment made differentiation difficult, reducing it to price competition


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Management Seeks Softer Dimensions of Expertise

• Client 1 RFP explicitly asked auditors to provide a “Summary of relevant training and/or networking opportunities (with locations) offered to your clients.”

• The RFP guides (AICPA; Audit Firm) list involvement with other clients in the industry, and other participants in the value chain (e.g., customers, suppliers) as desirable considerations

• Networks keep auditors at the forefront of technical knowledge, but also provide a platform for management views and issues to be given due consideration by regulators;

• Auditor’s potential as a connecting link to opportunities with industry competitors and regulators dominate concerns about conflict of interest and leakage of proprietary information

• Auditor seen as client’s leads to new customers as well as competitors with whom Client 1 wanted to collaborate

• Audit engagement viewed as more than an audit—a relationship that brings opportunities for business advantage and future connections.

• Management wishes not stated in RFP: responsiveness to management; Client 1 wanted to be treated like a first tier client; Client 2 wanted its own complexity to be appreciated, and overcome geographical challenges

• Expressed through subtle cues in meetings and interviews (responsiveness, cultural fit, chemistry, sharing wavelength)


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Building Relationships• “There are processes and there are structures, but

people do business with people.”---a Big-4 Managing Partner

• The interviews: the issuance of the RFPs by Clients 1 and 2 was not the beginning of the courtship

• Client 1: all invited auditors knew of the coming RFP• All non-incumbent audit firms had active business

development processes through which they had already targeted Client 1, and visited senior managers (CFO/CEO) of Client 1 in their offices, or invited them to dinner and presentations (express their interest, exchange information, and develop personal rapport)

• Client 1 and Client 2: auditors established prior relationships from providing other services or through involvement in business and social communities.

• Early courting targeted at Client 1’s senior managers (i.e., the CEO, CFO), and not the audit committee, as the key decision makers in this process

• The U.S. audit partner also indicated that the key people who would be involved in courting would be the CFO and Controller, and sometimes the CEO, even though the appointment formally made by the audit committee

• Prior research: weakly linked relationships (i.e., past client experience) with auditor satisfaction (Behn et al. 1997).

• Our cases: importance of relationships for clients and auditors; effort in building them; possible impact on auditor independence.


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Rapport and Cultural Fit• The neutralization of expertise shifts importance to

rapport and cultural fit • Interviews: Client 1 had been dissatisfied with the

“bedside manner” of the newly rotated engagement partner

• Clients 1 and 2 clearly expressed in their RFP documents and interviews that demonstrating rapport was paramount to auditors winning the engagement.

• Imitating the style, dress, appearance, and manners of those one wishes to please is a deliberate strategy in courting clients

• Written proposals mirror the clients: client references whose positions closely matched those of selection committee; majority of the references provided were executives of other clients; over 75% of the references that auditors provided to Client 1 were from CFOs, and only one audit committee chair.

• Interviews with audit partners confirm that the audit firms identify the key decision makers, and then choose referees to match the roles of the key decision makers

• The U.S. audit partner indicated that the key variable in choosing references was to identify the key decision maker and then choose a peer (the CFO, in this case) as the key reference.

• Auditors considered references from clients as being very credible and having a significant influence on the hiring decision.

• Auditors adopting client mottos and slogans in proposals and presentations (fit, culture, thinking, attitudes, chemistry, resonance of values)


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Past Guides the Present• Auditors’ reputation with the clients wins new

ones• Reputation and past experience with their client

was a major deciding factor with Clients 1 and 2. • For Client 1, the CFO and the audit committee

chair interpreted auditor reputation as the engagement partners’ personal reputation with other CFOs

• Client 1: Do other CFOs classified the auditor as either rigid (undesirable) or flexible (desirable). Rigid was sometimes described as issuing edicts (undesirable) versus discussing rationale (desirable) for an accounting treatment

• The audit committee chair said: “The most important issue for us is their reputation; that we can discern by references on how they operate with other companies in our industry.”

• No evidence of reputation with investors or any third party users of financial statements being a consideration.

• Auditors’ reliance on references from current clients to get future clients is potentially troubling for auditor independence; this reliance may bias auditors to gain favor with clients to serve as references.


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Independence of Auditor• What does it mean to be an independent auditor?• Absence of a prior relationship?• Yet, in both Canada and U.S., having a prior

relationship with the prospective client is an important qualification to be on the audit team (Client 1 and 2).

• Interviews reveal that including people with pre-existing relationships with the client in the audit team is a critical factor in engagement

• This relationship preference not limited to the engagement partner but percolates down all the way to junior auditors

• Audit firms sees auditing as a “relationship” business, and interested in assigning people to their teams who already knew management and had a cordial relationship with the prospective client

• U.S. partner revealed that auditors seriously consider the RFP process as a relationship-building opportunity to establish a connection with client even if the there is no immediate engagement

• Another channel for the prospective auditor’s past to influences success in the present courtship


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Demonstrating The Locus of Decision Making Power• Clients consider the decision making powers of the

local team vis-à-vis the head office• Client 1: preferred to have senior audit expertise

available locally to handle and resolve all complex accounting issues by the engagement partner.

• Clients impatient with rules imposed by distant bureaucracies and would rather deal with a person they know; understand the thought process of the partner who makes final decisions

• After the collapse of Enron and Arthur Andersen, LLP, this insistence on local partner autonomy is a sensitive issue for Big-4 audit firms; partners in Canada and the U.S. thought it was reasonable for the client to express a preference for engagement partner autonomy.

• One reasons given for the collapse of Arthur Andersen was the transfer of authority for making the final call on disputed technical issues from its vaunted headquarters unit of experts in Chicago to the local engagement partners (Toffler 2003)

• Apparently, the headquarters unit serve several important functions, including: (1) having a high level of expertise available to all audit engagements; (2) enforcing a uniform application of judgment across the firm; and (3) protecting the engagement partners from undue pressure from client executives by allowing them a shelter behind the opinion of the headquarters experts when differences with client executives arise


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Local vs. HQ Decisions• Interviews: Clients want local partner autonomy

including all complex accounting decisions• Auditors 1 and 4 emphasized the seniority of their

proposed audit partner and provided a description of their process to identify, discuss, and communicate such issues without promising local control

• Auditors 2 and 3 promised that final and binding decision on complex accounting matters will be made by the engagement partner. One firm promised that they “do not hide behind the head office.”

• One of the latter two firms: a communication and not substantive issue, because of firm’s normal consultation and quality control processes (the engagement partner would be a single point of contact for all accounting discussions with the client, not an important concession)

• The second firm indicated that the audit partner did, in fact, have autonomy and could decide if and when (s)he needed to consult head office

• The client cannot know whether the local partner or the head office makes the decision; they can only identify the person who negotiates with them on a contentious item and communicates the firm’s position

• Prior research: involvement of technical partners in the negotiation is beneficial to the audit firm (Gibbins et al. 2001).

• Auditors appear to be split on the benefits of involving head office technical experts in communication and negotiation

• Local partners’ share of engagement revenue exceeds their share of the cost of reputation damage, audit firm faces a difficult agency problem that clients seek to exploit


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Audit Fees• Client 1’s RFP invites bids for two years,

constraining auditor ability of auditors to low-ball the fees

• Incumbent fee for the current year as a benchmark (reflects knowledge of the client, assessment of risks and the extent of audit work necessary for the engagement)

• Client 1: bids for total engagement fee varied from materially below to materially above the current fee

• The successful bid materially below the current fee, although the management had stressed repeatedly that fees were not a major motivation for issuing the RFP.

• Incumbent was expected by others to bid (publicly disclosed) current fee, and this common knowledge was accurate.

• Client 1: the RFP preference for greater involvement of senior auditors, the low (winning) bidder proposed higher staff hours and lower partner/manager hours relative to incumbent’s current time budget

• Interviews: Client 1 audit chair and CFO concerned that a low bid meant the auditor might not have understood the amount of work involved. The CFO said: “For Audit Firm 2, we were not sure on how they would do because the audit fee was too low…I think they may have underestimated the work they needed to do on a couple of our subsidiaries.”


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Hours and Rates• Auditor 3 bid marginally lower, and Auditor 4 bid

marginally higher than the current fee for substantially more partner/manager hours and more than double the staff hours

• The AC chairman of Client 1’s did not consider the Auditor 4 hours credible

• RFP solicited hourly rates, but did not factor in the clients decision

• Auditor 4 may have misinterpreted the importance of this number, and undermined his own credibility

• Client 2: auditors believed fees would be a major determinant; management indicated it wasn’t a key factor; the incumbent bid 100% of current fee, and the rest bid just below that

• All audit firms developed a table breaking down fees by rank and financial statement cycle, (e.g., sales, receivables), and auditors claimed that estimating the total required hours was important in determining their fee

• RFP indicated that future billings for audit fees had to identify each person by rank, hours worked, and the hourly rate quoted in the proposal (bid).

• Conjecture: Breakdown of total quoted fee into hourly rates, hours, and task components may be a client strategy to reduce auditors’ degrees of freedom, serving as additional bargaining and monitoring instrument, facilitating cross-checking the auditor billings against the accepted bids

• Client 2 requested a blended hourly rate, which facilitated comparison of bids


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Multiple Bids from a Single Auditor

• Auditor 4 submitted bids for three different levels of audit service; middle bid for marginally higher than the current fee, the other two bids were priced at materially above and marginally below the current fee

• The premium priced service: more experienced partner and staff on the engagement, and many other ‘non-audit related’ items such as more frequent meetings , more “free” time to consult on issues, more customer satisfaction discussions, and more industry and strategy related discussions.

• The discounted fee option required extensive work commitment from Client 1’s internal audit department, less frequent meetings and fewer advisory discussions.

• This endogenous appearance of multiple bids for service of variable quality/quantity in a regulated domain raises several intriguing questions.

• What should be the regulatory stand on such variety of service levels? Auditor bundling its consulting services into the audit fee? Parallels in other learned professions?

• Unclear how widespread this strategy is in practice, as we did not observe fee levels in any other cases studied

• Unexpected appearance of this practice provokes some rethinking about pricing of audit services


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Gradation of Partners• What does the gradation of partners imply for the value

of the audit firm and its brand? • Informal identification of audit managers and staff by

seniority and industry experience (e.g., industry expert senior manager) is common;, this type of differentiation in pricing among partners by experience is uncommon

• In professional service markets where services are sold to retail customers, it is common to see differential pricing based on the service provider’s experience (Lasik eye surgery, the price increases with the number of operations done by an eye surgeon)

• Can audit firms do better by such partner-level differentiation, as opposed to relying on the firm’s brand name and a single billing rate for all audit partners

• In this case, the multiple billing options created confusion, and the attempt to very explicitly price the experience of team members backfired and undermined the credibility of the audit firm.

• When commenting on the multiple prices proposed, Client 1’s AC chair said: “I think at the end result that was probably a mistake on their part…I don’t care for that type of stuff… I didn’t think the idea of having an audit firm where the service you get depends on how much you pay is really the impression that they would want to give.”

• In the courtship process, setting fees is a way for auditors to demonstrate their value and signal their commitment to the clients. Some of the competing audit firms were aware of the three price strategy used by Auditor 4 and disapproved of it.


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Discussion• Client 1 developed an elaborate RFP, and engaged its

internal stakeholders in meeting and rating exercises to determine its preferred auditor

• In the courtship, Client 1 wanted, expected, and received numerous gestures and promises from the audit firms, who were all seeking to show their commitment to providing good client service and responsiveness to management’s needs

• Management knew its definition of audit quality—a partner with a reputation for working well with management, and visible signs that they would be a preferred client, and how to get the relevant information needed to make its assessments and rank the prospective audit firms

• Audit quality was not opaque for management. • Audit committee was involved in the selection process;

they relied on management to collect, evaluate and summarize information. At the end of the auditor-client courtship, the audit committee asked for, received, and endorsed the recommendation of management.

• The auditors had also done their homework, and based their pre-courting behavior on the desirability of becoming the auditor of Client 1.

• Courtship emphasized demonstrations of auditor commitment to the client, audit reliance on CFOs of current clients to vouch for them, and the inability of auditors to access crucial information for assessing risk (e.g., schedule of unadjusted errors).

• Significant power imbalance between the client and prospective auditors; auditors had surprisingly limited understanding of the underlying quality of internal controls, the disagreements (if any) between the client and incumbent auditor, and the unadjusted errors they might inherit


38

Discussion• Suggest that new auditors are not only more vulnerable

to fraud (Treadway 1978), but also to errors in early years (Johnson et al. 2002).

• Auditors’ lack of proper risk assessment during engagement ; Placing high reliance on management reputation and oral representations is a risky strategy for audit firms.

• Client perception that all four audit firms had the capacity to do a good job on engagement neutralized the auditor efforts in assembling teams of experts for engagement

• Auditors differentiate themselves through (1) pre- and post-RFP courting of the client (bringing the national CEOs); being responsive to client desires for local expertise, offering to move an industry specialists; mirroring the client in presentations of self and selection of referees; promising engagement partner autonomy; and lowering their fees

• Inability of audit firms to create a clear expertise-based differentiation and reliance on referrals from CFOs of current clients may undermine the profitability and independence of audit firms.

• Auditor rotation has often proposed as a way of preserving the independence of auditors from their clients. Rotation of auditors (partners or firms) will bring a fresh set of eyes (Tan 1995), fewer blinders, and uproot entrenched relationships that may override their objectivity and independence. There are also well-known arguments against rotation as time and repetition can help the auditor develop perspective and expertise (Arel et al. 2005)


39

Discussion• A counterargument from this field investigation: process

of engagement, combined with competition in the market for audit services, weaken auditor independence, promotes perennial courtship by audit firms, and repeat this weakening of independence more often. Rotation affords clients the opportunity to shop for opinion and avoid auditors who they don’t like without having to fire them (regulatory red flags) Rotation pressures on auditors to demonstrate commitment and responsiveness to the management of prospective as well as current clients (to win new engagements)

• Reforms and regulations often based on the mistaken assumption that the relevant information for making decisions is readily available, perhaps even as common knowledge

• Regulatory debates about auditor independence ignore the selection processes, the level of information asymmetry between contracting agents and the difficulty in gathering the relevant information for making good decisions are underestimated

• Lack of alignment of private incentives of contracting agents and their public duties adds an additional layer of friction in this process (Jamal and Sunder 2009). Dispersed information and conflicting incentives can undermine most well-intentioned regulatory reforms

• Auditor rotation requirement will drive small- and medium-sized audit firms out of the market, and increase the concentration of the audit market

• Questions: Does increasing the frequency of courtship through mandatory audit rotation serves to increase the welfare of shareholders? The only benefit to shareholders from the process documented here was a lower audit fee, which is offset by transition costs incurred by Client 1


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What Did We Get?

• New details of engagement, absent in public record, useful to review assumptions; new variables for models

• New questions, and conjectures about engagement

• Documenting the process (for auditors, managers, boards, and regulators)

• Understanding how information is produced, exchanged and used in auditing

• Rich materials for nuanced class discussion of accounting and governance

Thank You.

[email protected]

www.som.yale.edu/faculty/sunder

mailto:[email protected]

http://www.som.yale.edu/faculty/sunder

http://www.som.yale.edu/faculty/sunder


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RFP: Introduction• Introduction• X Company …At close to $XX billion in balance sheet

assets and more than Y years of strong growth including XX percent over the last 12 months, the necessity to continually review business strategies and risks is paramount in ensuring sustained success.

• Of late, there have been multiple and significant changes in accounting standards, regulations and the XYZ industry that have all combined to add a great deal of complexity to our business with no slowdown in sight. To name a few, the recent adoption of XYZ accounting standards, the upcoming implementation of the XYZ Industry regulations and the transition to IFRS over the next 5 years represent major changes to our business organization.

• Against this backdrop, X company has determined it is timely to review the availability of financial services audit expertise and resources in Canada and is undertaking a Request for Proposal (RFP) for independent audit services. This document outlines the general principles of the RFP. We highlight that our preference would include the most senior expertise to be based in Region of Canada, but it is not essential.

• All information will be provided to you in strict confidence. Please complete the RFP Acceptance and Confidentiality Agreement (Appendix A) and return it to Mr G as outlined in the Communications Section. The supplemental information package will not be distributed prior to the receipt of the RFP Acceptance and Confidentiality Agreement. Please note this RFP is being extended to Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers.


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RFP: Scope of Services• Your audit should be conducted in accordance with Canadian

Generally Accepted Auditing Standards and will commence with the period ending year end date. The audit will be for the consolidated financial statements of X company.

• The mandate will include a review of the interim financial statements for each of the interim periods. For greater clarity, the first interim review would be for the three months ending Date.

• The mandate also includes:• The statutory audit of Subsidiary 1, 2, and 3; • Communication of weaknesses found in internal controls

during the course of the financial statement audit;• Analysis of accounting questions and issues in the context of

the audit;• Review of Management’s Discussion and Analysis, Annual

Information Form, and Annual Report to the extent required by professional standards;

• Review of quarterly report to shareholders (including financial statements and notes);

• Specified audit procedures for Subsidiary 4 as required by the New York Stock Exchange;

• Specified audit procedures and audit report on specified financial information for X Company as required by Industry Association;

• Review of audit working papers of Subsidiary 5’s external auditors (Audit firm);

• Audit of financial statements of Special entity (non-consolidated special purpose entity).

• Note: The RFP does not include the audit of Subsidiary 5.


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RFP: Process Description

• The RFP process will be conducted in the following phases:

• Information gathering;• Submission of a written offer of services;• Presentations; and• Selection.• The Audit Committee has established a Selection

Committee to oversee the RFP process. The Selection Committee is comprised of:– A, Chair of the Audit Committee,– Members of the Audit Committee, – B, Chief Executive Officer, – C, Chief Financial Officer, – D, Head Internal Auditor, – E, Senior Vice President,– F, General Counsel, and – G, VP Finance

• The Selection Committee will make recommendations to the Audit Committee and the Audit Committee will select the external auditor for recommendation to the Board and shareholders.


45

RFP: Communications• The RFP process will be open and equitable for all firms. We will

endeavor to ensure all firms have access to the same information. No information in one proposal will be disclosed to another firm in the RFP process.

• Management will be available to answer questions throughout the process. To aid in the information-gathering phase, a schedule of availability with management will be established.

• To help ensure an efficient and equitable proposal process, Company X is requesting that each proposing firm comply with the following general guidelines:

• All inquiries relating to this proposal process, including arrangements for site visits and interviews, are to be directed to G, VP Finance. He will be your single point of contact. Contacting any other member, officer or director of X Company could lead to disqualification. G’s contact information follows:

• Contact information• To facilitate the review of the Company’s information, a data room will

be established at X Company’s corporate office located at address. A list of information that will be available in the data room is attached as Appendix C.

• In addition, the following individuals will be available to meet with and provide each firm with their perspective of the critical business issues facing Company X. The individual interviews will be restricted to 30 minutes, unless an alternative time frame has been agreed upon in advance, and no more than three people from your firm should attend each interview. The VP Finance will coordinate the interviews.

• B, Chief Executive Officer, • A, Chair of the Audit Committee, • C, Chief Financial Officer, • G, VP Finance, • F, General Counsel, • H, Treasurer, • D, Head Internal Auditor, • I, Senior Vice President, Operations,• J, Chief Technology Officer.


46

RFP: Proposal Form and Content

• Eight (8) copies of the submissions are to be received by the undersigned no later than date. Your submissions should be no longer than 30 pages, plus curriculum vitae for proposed team members. The submission should contain the following:

• 1. Detailed description of audit approach• Approach • Methodology for assessment of risks and establishing

audit approach • Risks identified• Scope and approach of work (including adoption of new

significant accounting policies) • Objectives • Split of work among various locations and corporate

functions• Communication with audit committee, including all

communications required by X Company’s Audit Committee Terms of Reference

• Engagement Letter• Breakdown of audit hours for X Company audit broken

down by major financial section for field staff (i.e. cash, …, other assets) with partner and manager time noted in total.

• Use of Internal Audit• Quality control• Independence policy


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• Expertise• Experience and location of the audit team members

– Partners – Senior Managers / Managers

• Industry expertise by location• Brief summary of Industry 2 audit and assurance experience• Availability and location of resources for complex accounting

questions – Functioning and size of professional practice groups – Availability of local resources

• Confirmation that the firm is duly registered with the Canadian Public Accountability Board (CPAB)

• 3. Transition plan (if applicable)• Description of transition plan to ensure minimum

disruption to X Company management• Description of team experience in transition of audits,

references if applicable• 4. Independence• Confirmation of your independence from X. Company.• If confirmation not available, then an explanation of the

process to ensure independence. • 5. Fees (including any separate fee for CPAB)• An itemized fee quotation for the year ended Year 1.• An itemized fee estimate for the year ended Year 2• An itemized fee estimate for each entity and

requirement listed.


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• References• The Firm shall provide a list of clients (minimum three (3):

maximum five (5)) that are significant Companies in Industry X who are currently major accounts of the Firm for services similar or identical to the Services outlined in this RFP. The firm will describe how the services provided to these references are similar to the services proposed to X Company.

• The Firm must include the client’s company name, address, contact name, telephone number and e-mail address, and the length of the association. The Firm’s references will be contacted.

• 7. Tax• We would like you to address your view on the nature and

extent of work that you could provide for tax compliance or tax planning activities.

• 8. Other services offered by your firm• We would like your proposal to include an overview of the

other services offered by your firm, remaining independent. Overview could include:

• Listing of relevant publications available• Summary of relevant training and/or networking opportunities

(with locations) offered to your clients • 9. Presentation• The objective of the presentation is to allow you to present

your offer for services, respond to the questions from the Selection Committee and allow us to meet your engagement team. Presentations to the Selection Committee are expected to be scheduled for Date with the Board decision to follow on Date.

• We request that your oral presentation not exceed 60 minutes. After your presentation, thirty minutes will be allotted for questions and discussion.


49

RFP: Expectations• Throughout the auditor/client relationship we expect:• An open and professional rapport with direct access to

decision makers for all accounting/auditing matters • An efficient and effective risk-based audit process • Significant and relevant industry experience of the members of

the audit team• As partners or managers assigned to the engagement change

over time, the firm will agree to provide resumes of new personnel to ensure that each have the requisite technical knowledge and industry expertise to conduct a thorough and efficient audit

• All billings will be cleared in advance of submission. All billings should provide a detailed description of the work performed and a summary of the hours and rates billed by person.

• The annual audit plan will be reviewed with X Company and its Audit Committee in sufficient detail to allow X Company to understand your audit approach (including the assessment of significant risks) and efficiently prepare for the audit process.

• Timeline• RFP request letters sent to firms.Day 02.• Return of RFP Acceptance and Confidentiality AgreementDay

7• Distribution of Supplemental Information packageDay 7• Data room availabilityDays 7-35• InterviewsDays 35-36• Receipt of submissionsDay 51• Presentation to Selection CommitteeDay 81• Board approves selectionDay 87• Communication of decisionDay 88• Debrief for firmsDays 98-102.


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RFP: Acceptance and Confidentiality Agreement

• RFP Acceptance and Confidentiality Agreement• • To: C, Chief Financial Officer• Fax: X Company• We accept the request to present a proposal to

provide external audit services to the X Company . We agree to keep in confidence all information received by us in connection with the proposal process, including the Supplemental Information, not to disclose it to third parties, not to use it for any other purpose than for the proposal, and to destroy all paper and electronic information in the event that our firm is not selected to be the independent auditor as a result of this proposal process.

• Firm Name:• Partner:• Contact Information:• e-mail:


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RFP: Supplemental Information(To be provided on receipt of signed RFP Acceptance and

Confidentiality Agreement)

1. Organization structure2. 200X Annual Report, Annual Information Return and

Management Information Circular. 3. Q3 200X Report to Shareholders4. Data room details and arrangements5. List of statutory audits and most recent financial statements6. Appendix C7. Information to Be Available in the Data Room8. Organizational Charts9. Corporate structure10. Executives11. Finance12. Internal Audit13. Corporate Office14. 200X Strategic Plan; 200X Business Plan15. Consolidation worksheet (and entries) as at Date, 200X16. Operating Manual17. Board and Committee Minute Books18. Accounting Policy Manual19. Certification Project flowcharts for key controls20. Quarterly financial reporting disclosure framework 21. Timeline for Interim and Annual Audit22. Internal Audit Scope and Plan23. Overview of IT Systems24. Risk reports 25. Asset listings26. Year-end working paper files – X Company, Subsidiary 1 and

227. Additional information


52

Table 2: Timeline of RFP process for Client 1

Event Timeline (Days)

Description of records produced

Made available to researchers (indicated by *)

1. Client sends RFP request letters to firms

0 RFP document *

2. Firms return RFP acceptance and confidentiality agreement

7 Agreements from 4 firms

3. Client distributes supplemental information package

7 Organizational information

Financial reports and shareholder communications

Data room details and arrangements

4. Data room availability

7-35 Organizational Information

Strategic and business plans

Policy manuals

Internal control reports – IT, Internal Audit, flowcharts

Board meeting minutes

Refer to RFP in Appendix A for complete list

5. Prospective firm and client interviews

35, 36 n/a

6. Receipt of submissions

51 Audit firm proposal (bid) documents

*

7. Read, summarize and evaluate written

Table listing Pros and Cons of each proposal

*


53

Interview Script for Clients• I. Background• Q1. How long did your previous audit firm audit you before you

put out the request for Proposal (RFP) ? _______Years.• Q2. Why did you decide to put the audit up for bid? Please list

the reasons in the order of importance (highest first):• 1.

___________________________________________________________

• 2. _____________________________________ ________________________

• 3. _____________________________________ ________________________

• Q3. When you issued the RFP, what chance did you think the incumbent firm had of retaining the audit engagement? ______ %

• Q4. How did you decide which audit firms to invite to bid on the engagement?

• Q5. Did you consider any non Big-4 audit firms? Explain why or why not.

• Q6. On a 9 point scale, how would you rate your 2007 audited financial statements ____

• Where 1= extremely conservative, 5 = average, and 9 = extremely aggressive

• Q7. What other professional services do you procure through external contracts (e.g. actuarial, valuation, legal), and are these service providers subject to periodic bidding (every n years)?

• Service ProviderAverage Periodicity of Being Put up for Bid (in years)Not Put Up For Bid1.2.3.4.5.


54

Interview Script for Clients• II. Characteristics of Audit Firm That Can be Observed Externally• Q8. On a 9 point scale, how important is the size of the audit firm? ______• Where 1= not at all important, 5 = average, and 9 = extremely important• Q9. Do you perceive any differences in the size of the bidding firms, or are

they all about equal in size? Explain • Q10. On a 9 point scale, how important is the reputation of the audit firm?

______• Where 1= not at all important, 5 = average, and 9 = extremely important.• Q11. Do you perceive any differences in the reputation of the bidding

firms, or do they all have about the same reputation? Explain• Q12. On a 9 point scale, how important is the independence of the audit

firm? ______.• Where 1= not at all important, 5 = average, and 9 = extremely important.• Q13. Do you perceive any differences in the levels of the independence of

the bidding firms, or are they all about equally independent? Explain• Q14. On a 9 point scale, how important is the industry expertise of the

audit firm? ____• Where 1= not at all important, 5 = average, and 9 = extremely important.• Q15. Do you perceive any differences in the industry expertise of the

bidding firms, or do they all have about the same level of Industry Expertise? Explain

• Q16. On a 9 point scale, how important is the audit fee quoted by the audit firm? ______

• Where 1= not at all important, 5 = average, and 9 = extremely important.• Q17. Do you perceive any differences in the audit fee quoted by the

bidding firms, or are they all approximately equal? Explain• Q18. How important are the following attributes of the audit firm? Please

rank the listed categories from 1 (Very important), 2 (Medium important) or 3 (not important).

• Rank (1, 2 or 3)• The size of the audit firm• The reputation of the audit firm• The independence of the audit firm• The industry expertise of the audit firm• The audit fee


55

Interview Script for Clients• III. Characteristics of Audit Firms That Can Be Observed

Internally :Accounting Policy Choice Issues• Q19. Are there a set of key accounting issues that you wish to

know the auditors opinion on? Explain. Do bidding firms differ on these issues?

• Q20. What characteristics do you desire in an engagement partner? How do bidding firms differ on these characteristics?

• Q21. What characteristics do you desire in a relationship partner? Do bidding firms differ on these characteristics?

• Q22. Do you have a preference for who makes the final call on accounting policy issues, and do bidding firms differ on this issue?

• Q23. Do you care about the location of expertise required to deal with complex accounting issues (local, regional, national)? Explain.

• Q24. Do you perceive any differences in the other services (e.g., tax) offered by bidding firms, or are they all have about the same level of other services? Explain

• Q25. How important are the following attributes of accounting policy issues? Please rank the listed categories from 1 (Very important), 2 (Medium important) or 3 (not important).

• Rank (1, 2 or 3)• The audit firms position on critical accounting issues

• The engagement partner• The relationship partner• Who makes the final call on accounting issues

• The location of expertise• The other services offered by the audit firm


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Interview Script for Clients• IV. Characteristics of Audit Firms That Can Be Observed

Internally: Audit Methodology • Q26. Audit Committees often ask auditors about their “Audit Approach”

and “Risk Approach.” What do you learn from answers to such questions, and how do the bidding firms differ from each other in this respect?

• Q27. Audit Committees often ask auditors to specify the total number of audit hours worked, as well as a breakdown of audit hours by staff level and by functional area. What do you learn from this breakdown of audit hours, and how do the bidding firms differ on this audit production process?

• Q28. Audit committees often ask auditors about quality control processes, and availability of expert advice from the professional practice group, as well as from the local office. What do you learn from responses to these questions, and how do bidding firms differ in terms of how expertise is made available to you?

• Q29. Since you have an internal audit department, what do you want to know regarding the relationship between external and internal auditors, and how do the bidding firms differ in terms of their proposed interaction with your internal audit department?

• Q30. What type of tax and other services would you be interested in purchasing from the external auditor? How do bidding firms differ in the quality or type of such services they can offer?

• Q31. How important are the following attributes of audit firms? Please rank the listed categories from 1 (Very important), 2 (Medium important) or 3 (not important).

• Rank (1, 2 or 3)• The Audit Approach• The Audit Production Plan (Total audit hours and

breakdown by staff level)• Availability of Expert advice locally and from other offices

• Engagement with Internal Audit department• Provision of tax and other services


57

Interview Script for Clients• V Relationships with the Audit Firm • Q32. How do you assess your interpersonal “fit” with the audit

firm? How do bidding firms vary in terms of their fit?• Q33. How do you assess responsiveness of the audit firm to

your needs? How do you define “responsiveness” and how do the bidding firms vary in terms of responsiveness?

• Q34. How do you assess intention and /or ability of the audit firm to maintain staff continuity? How do bidding firms vary on this attribute?

• Q35. How do you assess skepticism of audit partner / team? How do bidding firms vary on this attribute?

• Q36. How do you assess ability of the audit firm to deal with regulators and other external agents in the firm’s environment? Do you perceive a difference in bidding firm’s ability to deal effectively with external regulatory bodies?

• Q37. How important are the following relationship attributes? Please rank the listed categories from 1 (Very important), 2 (Medium important) or 3 (not important).

• Rank (1, 2 or 3)• The Interpersonal fit• Responsiveness of the audit firm• Staff continuity• Skepticism of Audit partner / team• Deal effectively with regulators and other external

agents


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Interview Script for Clients• VI. Other Questions• Q38. What additional information / type of questions do

audit firms ask when they meet you? Do bidding firms vary in the nature or amount of questions asked?

• Q39. What do you learn from the presentations that is incremental to the written responses provided by the audit firms?

• Q40. What (if anything) really stood out about each bidding firm?

• Q41. What was the key factor(s) that led to the choice of your new auditor?

• Q42. Who came second? Explain• Q43. Compared to purchasing other professional

services (e.g., legal, actuarial, valuation) how comfortable are you with assessing the quality of audit service you actually receive. Please use the 9 point scale below. Assessing quality of audit services is ______

• Where 1= completely opaque and much more difficult to assess than other professional services, 5 = average, and 9 = extremely transparent and much easier to assess than other professional services.

• Q44. Please provide a copy of a RFP for audit, actuarial, tax or any other service that you were involved in, and indicate what part(s) of this RFP you were involved in (or is the RFP mostly a standard template?).


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Interview Script for Auditors

• I. Background• Q1. What do you like to see in a Request For Proposal

document? Please list in order of importance (highest first):

• 1. ____________________________________________________________

• 2. _____________________________________ ________________________

• 3. _____________________________________ ________________________

• Q2. When a RFP is issued, on average what chance do you think the incumbent firm has of retaining the audit engagement? ______ %

• Q3. What additional questions would you ask the prospective client?

• Q4. Are you able to glean any additional insight (beyond what was written in the RFP) into the motivation behind the RFP? If so how, and what do you think the motivation was for this company?

• Q5. What part of your proposal response is standard, and what part is tailored specifically to the company?


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Interview Script for Auditors

• II. Specific Responses on Your Proposal• Q6. How do you decide which people (and how many)

to “introduce” to the prospective client in your proposal?• Q7. How do you decide which other services (skills) to

mention in your proposal? • Q8. How else do you convey your expertise?• Q9. How do you convey your responsiveness / fit with

the client?• Q10. How do you decide what fee to charge?• Q11. What fee do you think the incumbent auditor will

quote? Explain• Q12. What fees do you expect other bidding firms to

quote?• Q13. Does your presentation convey new information or

just re-emphasize your written proposal? Or is the presentation meant to convey something else?

• Q14 Do you learn anything out of this process that will be helpful to you on future engagements?

• Q15. Please provide a copy of a RFP for audit, actuarial, tax or any other service that you were involved in, and indicate how these RFP differ across services. Are all the RFP’s just using a standard template or is there some significant adaptation done?

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