Dan Stone and Yu-Tzu Chang's paper “Impression Management in Public Sector Audit Proposals: Language and Fees,” was recently published in the European Accounting Review.
Summary: Do accounting firms make promises to potential clients that are inconsistent with public interest concerns about the audit firm independence? Do audit firms “sell” audits to clients primarily based on public interest concerns (e.g., independence), or, to serve the clients’ business need promises? Is the audit firms’ pitch, i.e., selling points to the client, related to the fees proposed for the audit? In our paper, “Impression Management in Public Sector Audit Proposals: Language and Fees” Yu-Tzu Chang and I explore these issues with a unique data set that Dr. Chang hand collected. Specifically, many governmental auditing engagement proposals in the United States are available through governmental open record requests. Dr. Chang spent many months making and following up on these requests. The result is a sample of about 350 governmental audit proposals from 15 US states. The engagements in our sample included state and governmental units, school districts, counties, cities, colleges, and other types of governmental entities.
To investigate our research questions, we used text analytics software that identified whether the proposal primarily consisted of language (i.e., words) related to “professionalism,” i.e., auditor independence and competence, versus “commercialism,” i.e., audit firm cooperation with the client and the audit firm’s willingness to partner with the client and to serve the clients’ business interests. To identify professionalism versus commercialism, we created word lists that captured the dimensions of these concepts. We also included data about the types of engagements and the proposed engagement fees.
Some of the results of our research are concerning about the promises that audit firms make to their potential clients, that is, that audit firm independence may be an issue in US governmental audits. Specifically, most of the audit proposals in our sample (about 40%) use primarily commercialism language (i.e., describing how the audit firm will help the clients’ business) and propose low audit fees. We also find that the quality of the internal audit office in the US state has an influence on the success of audit firms’ engagement proposals. That is, in US states with a weak internal audit office, more commercial language in the audit proposal increases the chances that the audit firm will win the engagement. However, this result is not true in states with a high quality internal audit office. This suggests that the quality of a US state’s internal audit office influences the behavior of the auditors in that state.
Our results are concerning in that they suggest that many US governmental audit firm proposals propose a low fee and promise, primarily, to the serve the clients’ business interests as opposed to promising to protect audit firm independence. We also find that proposals that have more commercial language are also more likely to propose lower audit fees. In summary, our research suggests that there are good reasons to be concerned about the promises made by audit firms to their prospective clients in our sample of US governmental auditing engagement proposals.