Perceptions of Audit Service Quality and Auditor Retention

Abstract

Prior research has argued that perceptions of the breadth and quality of auditor‐sourced services relative to rival audit firms are of paramount importance to client management when making auditor retention decisions. However, the audit quality factors affecting auditor retention are under‐researched. This study examines the association between perceptions of audit service quality and auditor retention in the compulsory audit tendering context of local government in the Australian state of New South Wales. This context overcomes constraints of unlimited tenure and high costs of changing auditors in prior studies of auditor retention in voluntary tendering contexts, and has high retention rates at tender and evidence of council satisfaction with audit quality. We use a questionnaire survey of 48 audit service quality attributes drawn from the audit service quality literature and administered to finance professionals and internal auditors across all New South Wales local councils. We hypothesize a positive association between perceived audit service quality and auditor retention due to council satisfaction with audit quality. We generate factor scores to test the hypothesis in a logistic regression and find evidence that higher‐order audit quality factors of relationship (via the expertise dimension) and service qualities (via the responsiveness to client needs dimension) are associated with auditor retention, and are worthy of attention by audit firms in order to enhance client commitment and their likelihood of being retained as an incumbent auditor.