Abstract This paper examines the impact of competition for governmental audits on the quality of the resulting audits. Conventional wisdom suggests that increased competition and the resulting pressure to minimize audit fees have contributed to poor quality audits. In contrast, economic theory generally predicts a positive relationship between competition and quality. This study investigates this apparent conflict. A model of the demand for audit quality is described and the relationship between audit quality and competition is empirically examined on a sample of entities receiving federal financial assistance. Competition is measured as the number of bids received for an audit engagement. Audit quality is defined as compliance with professional standards for reporting and fieldwork. The assessments of audit quality were made by government officials responsible for reviewing the work of independent CPAs engaged in audits of federal assistance programs. The empirical analysis found that entities receiving greater numbers of bids for their audit engagements were significantly more likely to receive an audit of acceptable quality. In addition, competition was found to have a negative effect on the level of audit fees. These findings are consistent with the proposition that increased competition results in increased audit quality.
Copley et al. (Mon,) studied this question.