UK interview evidence

Introduction Significant changes in the auditing environment world-wide have, in recent years, led to important changes in the behaviour of market participants. The main environmental changes have been the world-wide recession, dating from approximately 1989, which led to overcapacity on the supply side of the market. These changing competitive pressures resulted in aggressive fee renegotiation and competitive tendering of audit services by companies (see, for example, Beattie and Fearnley (1994) for the UK; and Lawson (1993) for Australia). Moizer (1994) specifically identifies tendering as a means by which independence is threatened: “the use of the tender process will enable the management to claim that the auditor was replaced because a cheaper one was found and not for any reasons of dispute between the company and the audit firm” (p. 20). There have been reports of, and evidence concerning, significant audit fee discounting (see, for example, Accountancy (1992) and Accountancy Age (26 May 1994) for the UK; Hancock (1993a) for South Africa; IAB (1993a) for Italy; and IAB (1993b) for Denmark; Johnson (1994) for Australia; and Maher et al. (1992) for the USA), lowballing (see, for example, Hancock (1993b) for Italy; LaFrentere and Carr (1991a) for Australia; LaFrentere and Carr (1991b) for Canada; and Pong and Whittington (1994) and Financial Times (18 May 1995) for the UK), and suggestions of cross-subsidization of audit costs from nonaudit services (NAS) provided by audit firms (Peel and Brinn, 1993). In combination, these behavioral responses have produced an increase in the incidence of tendering and in the overall rate of auditor change. For example, Beattie and Fearnley (1994) estimate that the incidence of tendering by UK listed companies which had/had not changed auditor during the period 1987 to