The Structure of The Accountancy Profession
Price competition is a major factor in auditor independence. Prior to the 1970s audit firms were not allowed to advertise their services and take part in bidding competitions for contracts. Competition between the accountancy firms greatly increased when these restrictions were abolished, putting pressure on the audit firms to reduce audit fees. Competitive bidding for contracts has also encouraged the reduction of auditor engagement hours. The pressure to reduce costs may compromise the quality of an audit. If a firm feels threatened by competition they may be tempted to further reduce costs to keep a client. This risks lowering the standard of the audit performed and therefore mislead shareholders.
The increased competition between the larger firms means that company image is very important. No audit firm wants to have to explain to the press the loss of a big client. This gives the directors of the large company a commanding position over its audit firm and they may look to take advantage of it. The audit team would feel pressured to satisfy the needs of the directors and in doing so would lose their independence.
Read more about this topic: Auditor Independence
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