Competitive Procurement of Auditing Services with Limited Information

Abstract

We analyse the auditing procurement process when the client is initially uncertain about her/her auditing needs and when she/he cannot discern the level of assurance provided by the auditor. The client's limited information can lead to under-auditing and substantial rent for auditors, despite the presence of ex ante competition among auditors. The information asymmetry can also make it difficult for new auditors with superior auditing technologies to displace incumbent auditors. In addition, the asymmetry can limit the incentives of auditors to improve their technologies.