How Do Regulatory Reforms to Enhance Auditor Independence Work in Practice?

We conducted a field study of the process by which a company and prospective auditors court each other and enter an engagement. The Request-for-Proposal (RFP) process we observed had been triggered by an audit partner rotation and governed by recent legislation empowering the audit committee to make the auditor selection decision. The RFP resulted in a change in audit firm, and the process was characterized by: (1) asymmetry of power with significant management control in selection of the external auditor; and (2): auditors’ repeated demonstrations of responsiveness and commitment to management, rather than the audit committee, to differentiate themselves from other audit firms. Our study raises concerns that reforms designed to promote independence may not operate in the manner intended by regulators, as auditors’ efforts to win the engagement were directed toward management, and the audit committee delegated the auditor appointment decision to management