An Exploratory Study Into the Choice Criteria For Selecting an External Auditor By Listed Australian Public Companies

ABSTRACT - Listed Australian public companies are required by the Corporations Act to annually appoint an accounting firm to perform an external audit of their financial statements. The purpose of this research was to determine the choice criteria firms use in the auditor selection process. Eight criteria were identified from the literature and then empiricially tested in a national survey. The study resulted in identifying nine choice criteria with 'Technical Competence' and 'Client Orientation' two of the most important criteria and 'Level of Audit Fee' and 'Effective Preparation and Communication of Audit Submission' significantly more important to companies appointing a new auditor.

Citation:

Janelle McPhail and John Sands (1994) ,"An Exploratory Study Into the Choice Criteria For Selecting an External Auditor By Listed Australian Public Companies", in AP - Asia Pacific Advances in Consumer Research Volume 1, eds. Joseph A. Cote and Siew Meng Leong, Provo, UT : Association for Consumer Research, Pages: 127-134.

Asia Pacific Advances in Consumer Research Volume 1, 1994      Pages 127-134

AN EXPLORATORY STUDY INTO THE CHOICE CRITERIA FOR SELECTING AN EXTERNAL AUDITOR BY LISTED AUSTRALIAN PUBLIC COMPANIES

Janelle McPhail, University of Southern Queensland, Australia

John Sands, Griffith University, Australia

ABSTRACT -

Listed Australian public companies are required by the Corporations Act to annually appoint an accounting firm to perform an external audit of their financial statements. The purpose of this research was to determine the choice criteria firms use in the auditor selection process. Eight criteria were identified from the literature and then empiricially tested in a national survey. The study resulted in identifying nine choice criteria with 'Technical Competence' and 'Client Orientation' two of the most important criteria and 'Level of Audit Fee' and 'Effective Preparation and Communication of Audit Submission' significantly more important to companies appointing a new auditor.

INTRODUCTION

Auditing services are an integral part of the array of services offered by a large proportion of professional accounting firms. Companies that need to engage an accounting firm to provide a professional auditing service are faced with the problem of deciding whether to reappoint their incumbent auditor or appoint a new auditor. Determining the choice criteria companies use in the process of evaluating professional accounting firms that provide auditing services is the focus of this paper.

Initially the background to this paper is addressed , followed by a brief review of literature in the area of professional services decision making. Selection criteria used in the evaluation of auditing services are identified and the underlying dimensions of each criterion are presented. The methodology used to empiricially test the criteria is then addressed. The final sections of the paper present the analysis and findings followed by the conclusions and implications.

BACKGROUND

In early 1993 there were approximately 1050 public companies listed on the Australian Stock Exchange and these companies are required by the Corporations Act to appoint annually an accounting firm to perform an external audit on their financial statements. This requires the public company to either reappoint their current auditor or select a new accounting firm to perform the external audit.

According to Craswell (1990, 1991, 1992) each year on average approximately 10% of listed Australian public companies select a new accounting firm to perform this statutory requirement. When this level of auditor turnover is compared with the research completed by Coe and Palmon (1979) of the United States, which found an annual change rate of 2%, it is then particularly important that accounting firms providing an auditing service secure an adequate share of the small and very competitive auditing services market. The primary reason for this market share strategy is because this service is the only mandatory accounting service that must be purchased by all publicly listed companies.

In addition to the statutory required auditing services, publicly listed companies may purchase other professional accounting services including taxation; business/management consulting; recruitment; actuarial counselling; immigration; insolvency; management information/advisory services (MAS); basic accounting and managerial accounting functions that are discretionary to the corporate client. It is therefore important that accounting firms have a better understanding of the choice criteria utilized by current and prospective clients in the selection process for professional auditing services. The purpose of this research, using a descriptive design, was to determine the choice criteria publicly listed companies use in the auditor selection process.

PROFESSIONAL SERVICES DECISION PROCESS

Differences Between Generic and Professional Services

From the client's perspective, the purchase of professional services (such as accounting, law, medical services) differs in several aspects from the purchase of generic services (such as drycleaning, lawn care services). Hill and Neeley (1988) have identified a number of distinct differences: firstly, that professionals providing professional service possess expertise developed through formal higher educational preparation, continuing professional development and years of experience and exercise expert judgement in delivering the service. To provide auditing services in Australia, the members of the accounting firm must be registered auditors. The Corporations Act requires applicants for auditors registration to be members of one of the professional accounting bodies and for the applicant to hold their qualifications from a prescribed educational institution listed in the regulations of the Corporations Act (Butterworths 1991).

The second distinction is that professionals have a recognized group identity and are largely self-regulatory. In Australia, the ASCPAs (Australian Society of Certified Practising Accountants) and ICA (the Institute of Chartered Accountants in Australia) jointly represent the accounting profession in drafting practise and conduct standards. Finally, the distinction between professional services and generic services is that the selection and use of the former is perceived by the buyer as having a much higher level of risk. These particular risks are: Functional risk-Will the service meet the requirements?; Time risk-Can the service be performed within the time frame?; and Financial risk-the buyer not knowing the price at time of purchase due to an open-ended pricing system (hourly charge out rate).

Decision Making Process

These distinct differences between professional services and generic services affect the way clients make purchase decisions. Hill and Neeley (1988) indicated that consumers generally have a restricted ability to recognise the problem and limited access to external sources of information for professional services. However, listed public companies' problem recognition is activated because of the statutory requirements to engage an external accounting firm to audit their financial reports.

Although the majority of these companies reappoint the incumbent auditor, on average 10% of companies annually select a new auditor (Craswell 1990, 1991, 1992). When a company changes auditors, the decision makers will engage in the search for information on appropriate choice criteria to evaluate accounting firms. Few external sources of public information will be consulted mainly because of their limited availability as directed personal selling and advertising is still eschewed by many professional accounting firms. Personal information sources such as referrals will be consulted as these sources are perceived to have credibility based on expertise (Hill and Neeley 1988). Additionally, because most decision makers, or their advisory personnel, in public listed companies have accounting qualifications, they also will rely on internal sources of knowledge and expertise. Furthermore, in many cases the choice set may be limited to one of the "Big Six" accounting firms (Price Waterhouse, Arthur Andersen, KPMG Peat Marwick, Ernst & Young, Deloitte Ross Tohmatsu, or Coopers & Lybrand) because approximately 85% of annual audit fees are paid to these "Big Six" firms by a client base representing approximately two-thirds of the publicly listed companies in Australia (Craswell 1990, 1991).

Hill and Neeley (1988) indicate that there may be few alternative professional firms evaluated, because the comparison between firms is difficult and due to lack of experience by the buyer the set of evaluative criteria are incomplete or not developed. Few auditing firms may be evaluated because of the company's needs due to its size, industry specialization or its geographical dispersed operations. Limited comparisons may be due to the lack of heterogeneity in auditing services offered because of statutory requirements and obligatory professional auditing standards (DeAngelo 1981(b)).

However, it is believed that because the decision makers or their advisory personnel/committee are experienced in the accounting discipline, then a comprehensive set of evaluative criteria is developed as a basis for choosing the audit firm. Because there are unique features that are specific to the selection of auditing services by organizational clients, there is a need to develop a specific set of evaluative criteria used by accounting firm clients for this selection process. The identification of choice criteria considered important by listed corporate clients is critical for Australian accounting firms, so as to create and maintain a sustainable competitive advantage in the small and competitive auditing services market.

Choice Criteria used in External Auditor Selection

Professional services can be described in terms of characteristics or features that they possess. While many of these features of the service are endemic to the client, the choice criteria are those attributes that are important to the client in measuring or assessing the offerings (Crane 1989).

There have been a limited number of studies regarding the identification of choice criteria in the selection process of professional accounting services: Higgins and Ferguson (1991); Bojanic (1991); George and Solomon (1980). Several studies have focused on a single professional services criteria: Mersha and Adlakha (1991)-Location; Segal (1991) and Simunic (1980)-Price. Further studies have indirectly addressed choice criteria in relation to professional services: DeAngelo (1981(b)); Traynor (1984); Hite and Bellizzi (1984). Crane (1989) identified five choice criteria in relation to Lawyer selection while Chan, Chan and Yau (1991) developed and tested a number of criteria for the selection of a broker or brokerage firm.

However, there are shortcomings in the previous research. Firstly, studies by Higgins and Ferguson (1991); Bojanic (1991) and Crane (1984) focused narrowly on dimensions of service quality (tangibles, reliability, responsiveness, assurance, empathy) developed by Parasuraman, Zeithaml and Berry (1985) and did not acknowledge that there may be other choice criteria important in the selection of professional services outside of these dimensions. Additionally, the use of service quality as an evaluative criterion infers that consumers have had some experience with the service.

The second shortcoming is that Higgins and Ferguson (1991); Bojanic (1991) and George and Solomon (1980) identified choice criteria used by clients in selecting general accounting services and not for the selection of an auditing service. With the exception of George and Solomon (1980), these studies have not examined organizational choice criteria. Thirdly, many of the studies cited previously, only address the influence of one criterion and do not focus their empirical research on specific professional accounting services. That is, the criteria identified may not be applicable to the choice of all other professional services. It therefore appears there is a need to concentrate research efforts in the direction of developing a comprehensive set of criteria used by publicly listed corporate clients to select the external auditing service offered by accounting firms.

Drawing from previously cited studies the following eight criteria have been selected for empirical testing in relation to the selection of auditing services. The development of the underlying dimensions of each criteria has resulted from extensive analysis of literature, the researchers' knowledge and experience in the auditing field and a number of experience interviews with members of the accounting profession and industry. The eight criteria are listed below with reference to the literature. These criteria tend to encompass most of the dimensions that companies take into consideration when selecting their audit firm.

Competence. Specialized skills and knowledge, training, capability, technical competence, calibre and expertise of the accounting firm's auditing staff are dimensions included under this criterion by various studies (Crane 1989; Higgins and Ferguson 1991; Bojanic 1991; Traynor 1984). Specialized skills and knowledge would infer that the auditors are experienced in a limited number of industries. With the ever increasing operational complexity of modern business, an accounting firm needs to have the necessary range of in-house skills and flexibility to provide the services desired by the client.

Reliability. Crane (1989); Higgins and Ferguson (1991) and Bojanic (1991) either directly or indirectly, referred to dependably, timely and accurately performing professional services as well as quick response to clients' requests as dimensions of the criterion reliability. Additionally, Chan et al. (1991) identify reliability as a significant factor in the selection criteria for a broker or a brokerage firm.

Credibility. Chan et al. (1991) indicated that credibility is an important criterion and referred to good reputation, honesty and responsibility as underlying dimensions for this criterion. Additional dimensions cited in the literature were trustworthiness (Crane 1989) and integrity (Higgins and Ferguson 1991), the latter dimension being reclassified by Chan et al. (1991) in their study as credibility and reliability. The importance of credibility of the profession and its members to the public is reinforced by the Rules of Ethical Conduct issued by the ICA and the Codes of Professional Conduct set down by the ASCPs. Ethics therefore has been included as an additional dimension under this criterion.

Courtesy. This criterion, developed out of the service quality dimension, was directly cited by Crane (1989) and Higgins and Ferguson (1991) as having friendliness, politeness, consideration and empathy as the underlying dimensions. Empathy was also cited by Bojanic (1991) and was described as caring and individualized attention the firm provides its customers. Because many of these dimensions would contribute to a positive relationship between the firm and its clients, the concept of relationship building has been included as an additional dimension for this criterion.

Access/Availability. Access/Availability was seen as being of low importance in the study by Crane (1989). Dimensions of this criterion (Crane 1989) considered appropriate for this study were-location, ease of contact and approachability. The dimension location was also cited in studies by Mersha and Adlakha (1991); George and Solomon (1980) and Bojanic (1991). However, this criterion is more than the tangible factors and for this reason the researchers have included the accessibility to audit staff and accounting partners.

Price/Fee. The underlying dimensions for this criterion are the fee structure and the method of pricing services, for example, hourly charge-out rate or tendering of fixed fees. There are inconsistencies in the prior studies' findings as to the importance of this criterion. Studies have indicated that price/fee structure is an important criterion (Segal 1991; and Simunic 1980) whereas Crane (1989) supported the view that price/fee was not as an important criterion. The findings from George and Solomon (1980, p.81) indicated that although more than fifty percent (56%) considered fee estimates had some influence upon the selection process, only a small proportion (15%) stated this criterion has been highly influential in their selection .

DeAngelo (1981(a)) indicated that some audit firms in the United States employed a loss leader strategy that she titled "low balling". Evidence from an Australian study by Simon and Francis (1988) into fee structure, tends to indicate this practice may be adopted in the Australian audit services market. Alternatively, a higher fee may be perceived as a surrogate measure of quality of service, particularly when the services are provided by a large audit firm (1st Tier/"Big6"). Chan et al. (1991) included the 'scale of firm' as an underlying dimension of fee structure. In the advertorial by Deloitte Ross Tohmatsu (1993), value for money is believed to be a key want of clients.

Service Offering. Offering related services and auditing service specialization in the client's industry are two dimensions considered influential in accounting firm selection and are included under this criterion in George and Solomon's (1980) study.

Image. Refers to the "total perception" (Assael 1992, p. 716) that companies have of the external auditing firm. To some degree it includes the previous criteria but it is also based on the size and position of the accounting firm in the industry, degree of customer focus, appearance of facilities and personnel, membership to clubs, referrals, and sponsorship etc.

George and Solomon (1980) identified image as the most influential criterion, with referral from existing clients and recommendations by third parties (lawyers, bankers) being important dimensions. Although this criterion may overlap with previously identified criteria, there are other dimensions (size, customer focus etc.) that are important to explore under image. Aspects of this criterion have also been cited in research by DeAngelo (1981); Traynor (1984) and Hite and Bellizzi (1986).

In order for accounting firms to be effectively positioned, there is a need to understand the specifics of which criteria are important to publicly listed companies when selecting a new external auditor. It is believed that the above mentioned eight criteria will encompass most of the dimensions that companies take into consideration when selecting or reappointing an auditor.

The present study represents an attempt to contribute to the body of knowledge in the area of organizational buyer choice criteria for a specific professional service-auditing. The empirical research undertaken has broken new ground as no previous research of this magnitude on this topic has been performed in Australia. The findings of this research will be of considerable benefit to the accounting industry in light of further relaxation of the rules of ethical conduct (REC 7) and codes of professional conduct (CPC Section D) with regards to advertising, publicity and solicitation in 1992.

METHODOLOGY

The proposed research will be descriptive in nature as it is intended to produce an accurate description of the factors that represent the choice criteria used by publicly listed companies in selecting or reappointing an external auditing service offered by an accounting firm. This design will enable inferences to be drawn about the factors, or newly created uncorrelated choice criteria without establishing that some causal relationship exists (Luck and Rubin 1987).

Sampling Design

The population was defined as all public listed companies on the Australian Stock Exchange (ASX). Due to the high cost of obtaining listings on companies from the ASX the 1991 and 1992 final editions of the annual publication "Who Audits Australia?" were used to identify sampling units. These editions each contain approximately 95% of listed public companies.

The sampling procedure consisted of two main stages. At stage one, all public listed companies that indicated their intention to appoint a new auditor for the forthcoming financial period were selected. This stage resulted in identifying 201 companies that were invited to participate in the survey.

The second stage involved proportionate systematic sampling of those companies that indicated that they intended to reappoint the incumbent accounting firm. A sample size of 383 was calculated based on the remaining population in the publication "Who Audits Australia?". Companies were systematically selected from each industry code to maintain their proportion in the sample.

The sample size of the study was determined to be 584 companies consisting of public listed companies that appointed a new auditor and companies that reappointed the incumbent firm. This sampling strategy is inline with the objective of the study.

Data Collection Method

Because there are only a limited number of publicly listed companies in Australia, the scope of the study must be nationally based to ensure that the results are accurate and are a true representation of the population. To obtain the answers to those questions from such widely dispersed executives, a mail self-administered survey was the most advantageous type of survey instrument (Watson 1965). In addition to being geographically flexible, Kanuk and Berenson (1975) indicate that mail questionnaire surveys are cheaper than personal interviews, are free from interviewer bias and will allow the executive to consult with colleagues if necessary to ensure the accuracy of the reply. The mail questionnaire survey instrument also enables the executive to retain his or her anonymity and thus encourages participation (O'Dell 1962).

Questionnaire Design and Testing

A series of statements were developed to test each of the eight criteria and the underlying dimensions. Twelve business executives were invited to participate in testing whether these statements provided a clear meaning to the participants and reflected the criteria, as well as to obtain feedback about other possible criteria and/or dimensions.

Seven usable responses were received which indicated that the majority of the statements provided a clear meaning and that the participants identified the majority of the statements under the eight criteria. Where participants indicated that statements were unclear , identified the incorrect criterion or further statements were appropriate, a personal or telephone interview was conducted to retest modified statements or test new statements.

Using the feedback from the target participants, and literature support, the tested and refined 87 statements were incorporated into the survey questionnaire in a random order. The Company Secretary or equivalent person within the sampled public listed companies was requested to indicate the degree of importance on a 6 point rating scale (1 very important to 5 very unimportant with a sixth category-no influence/totally unimportant) that each of these statements had on influencing their decision to appoint a new accounting firm or to reappointing the incumbent accounting firm to audit their company's financial statements.

The final version of the questionnaire consisted of three parts.The first part was concerned with the company profile and operating data. The second part consisted of the 87 statements used to identify the choice criteria and the final section of the questionnaire focused on collecting demographic data about the respondent.

Data Collection Procedure

According to Kanuk and Berenson (1975) a major disadvantage of mail surveys is the low response rate and may lead to non-response bias (Wallace 1954; Schwirian and Blaine 1966). Kanuk and Berenson (1975) also cited research studies which found that a high response rate resulted from using a postcard. To increase the response rate a two-step follow-up procedure was undertaken, firstly by mail and then by telephone with the follow-up procedure implemented through the inclusion of a postcard with the questionnaire to be returned separately to confirm its completion and to maintain the participants' anonymity. Return free post self-addressed envelopes were provided for the questionnaire and the postcard.

The above data collection procedures resulted in a 27% response rate to the questionnaire and after editing a further 2% were removed due to being incomplete. This resulted in a usable response rate of 25% or 143 responses (47 companies changed auditor and 97 companies reappointed the incumbent auditor). This is still regarded as being an acceptable response rate for a mail survey. Major reasons for non response were (1) 12% unclaimed mail, or companies now in receivership or liquidation (2) 18% declined to participate at the telephone follow-up stage and (3) 43% unable to be contacted by telephone or never returned telephone call.

DATA ANALYSIS AND FINDING

The initial analysis involved testing for response bias between questionnaires that arrived early and those from the follow-up stage with results indicating that no significant difference existed between the early responses and the late responses.

A good cross-section of companies were represented in the 143 responses with 67 percent of companies being categorized as product oriented and 33 percent of companies service oriented. The mean number of operating years was 20, however 50 percent of companies have been operating for less than eight years. 32 percent of the companies have changed auditors or were intending to with the remaining 68 percent reappointing the incumbent auditor. 64 percent of companies currently engage one of the "Big Six" accounting firms to perform the external audit which is proportionally representative to the "Big Six" firms market share of listed companies (Craswell 1990, 1991).

An analysis of the respondents completing the questionnaire indicated that 38 percent held a company secretary position, 22 percent financial director/ controller position, and 16 percent a company accountant position. 92 percent of respondents were male, with an average age of 42 years. Some 70 percent of respondents held their current position for less than five years. Nearly all respondents had professional qualifications which reinforced the point raise by Hill and Neely(1988).

Identification of Choice Criteria

The initial stage in the analysis of the 87 statements/items required the removal of those statements that were considered not important in the evaluation of the professional auditing service. Items selected for further analysis must be based upon the objective of the research as techniques such as factor analysis and cluster analysis have no means of differentiating the relevant from the irrelevant items (Hair, Anderson, Tatham and Black 1992). Therefore, statements with 80 percent or more of the responses falling within the neutral, unimportant, very unimportant or no influence categories were removed prior to further analysis. This process resulted in 33 statements being deleted. All eight criteria identified from the literature were still represented by at least four statements for each criterion.

The remaining 54 statements/items were reduced to a smaller number of factors using Factor Analysis. Both the K-M-O measure of sample accuracy and the Bartlett test indicate that the input correlation matrix was amenable to factor analysis. A varimax rotation of the factor matrix yielded nine significant factors with eigenvalues greater than one (Table1). These factors together accounted for over 69 percent of the variance in the scale items. A minimum loading factor of 0.5 (Hair et al. 1992) was used for item selection resulting in 44 items loading significantly onto nine factors.

The internal consistency of each scale item was tested using item-to-total correlation. For each scale item, correlation coefficients were significant at the level of 0.05, indicating that the choice criteria scale items were internally valid. The choice criteria scales were also tested for reliability using Cronbach's coefficient alpha. The nine scales exhibited well over the 0.50 reliability level suggested by Nunnally (1978) as a minimum score for measuring the internal consistency among scale items. Hence, the scales were regarded as internally consistent (Table 1).

The choice criteria scales exhibited good construct validity. This was due to strong correlations (> 0.5) on items within each scale(criteria) that were associated, thus ensuring convergent validity and weak correlations(< 0.4) between items within one scale and other scales indicating discriminant validity.

Variance in Importance of Choice Criteria

To determine if the nine choice criteria identified from the factor analysis varied in importance between companies that changed auditors and companies that reappointed their incumbent auditor, a two-sample t test was performed on the factor scores. As highlighted in Table 2, two criteria were identified as being significantly more important (alpha 0.05) in the evaluation process for companies appointing a new auditor. These results will now be discussed in the next section.

Findings

The auditor selection process is regarded as complex, not unlike the selection process of other professional services. It would generally involve a committee using a multiattribute decision process to make the selection. The results of this research have identified nine choice criteria that are considered to influence the evaluation process in the selection of a new external auditor or the reappointment of the incumbent auditor. The nine choice criteria briefly described in Table 1 do differ to some extent from those criteria identified in the literature and from exploratory research. The average mean calculated for each criterion indicates that they varied in importance.

Reliability and Courteous Accessibility described the first factor and refers to having access to the accounting firms' members when needed and being treated in a polite and considerate manner. Corporate clients also consided it important that they can rely on the accounting firm to keep information confidential and the audit report will be delivered on time. This criterion has drawn upon underlying dimensions addressed in the proposed criteria: Reliability, Accessibility, Competence, Credibility and Courtesy. This newly identified criterion explained 26 percent of the variance and has a mean of 2.00-therefore indicating that it is an important criterion in the auditor selection process.

TABLE 1

CHOICE CRITERIA IMPORTANT IN SELECTING AN EXTERNAL AUDITOR

This result is supported by the work of Chan et al.(1991) in the selection of a broker where the largest explaining factor 'Credibiliity and Reliability' addressed similar issues. Crane (1989) identified courtesy, reliability, access and credibility as important criteria in lawyer selection. These results indicate that this criterion is also important in the selection of other professional services.

Technical Competence is a narrower criterion evolving out of the original criterion 'competence'. It refers to the accounting firms employees having the required level of knowledge and skills to be able to perform the audit. This criterion was considered slightly more important than the previous criterion with an average mean of 1.87. To some extent this criterion relates to the newly identified criterion Industry Specialization (Factor 7). It appears from this criterion that there is evidence that corporate clients would prefer the external auditing firm to have specialized (experience) with high profile companies in their industry. However, with a mean between important and unimportant this would indicate that industry specialization is not an important criterion for all companies.

TABLE 2

VARIANCE IN IMPORTANCE OF AUDITOR SELECTION CHOICE CRITERIA

Competence has been cited in previous reseach as being an important criterion in the selection of other professional services, however industry specialization has not previously been identified and may be only an important criterion in the auditor selection process.

Geographical Proximity emerged out of the criterion Access/Availabilty and focuses primarily on location of the accounting firm in relation to the company's business location(s). This criterion was considered to be relatively unimportant for most companies. This may be due to a large proportion of the auditing process being performed in the audited company and therefore location could become a more important factor to the accounting firm.

Level of Audit Fee was a criterion that was significantly (alpha 0.05) more important to companies that changed auditors than those corporate clients that were reappointing the incumbent auditor (Table 2). Based on the items within the scale , companies are seeking a low / competitive fee for the service.

Fee level was identified as being important in the selection of a brokerage firm (Chan et al.1991) and lawyer services (Crane 1989). Finding from the study by George and Solomon (1980) found that fee for accounting services was only partially influential in the selection process and other factors were more influential.

Possible reasons for fee level being significantly more important to companies changing auditors are firstly, the fee level was currently too high. During the recession when data was collected for this study, additional expenditure on a manadated external audit may have resulted in companies switching to a lower fee/ more competitive accounting firm due primarily to the company seeking cost saving measures. A second reason may be that a segment of the companies are far more price conscious and are willing to switch even if the result is lower quality. This is clearly an area that requires further research.

The next criterion, non audit Service Offerings did not vary from the original criterion identified and refers to the accounting firm offering other related services such as management advisory services. This criterion was considered to be slightly important with a mean of 2.87. This result confirms the findings by George and Solomon (1980) that offering related services will influence choice, however the firm must be regarded as having the expertise in providing these services with possible industry specialisation.

A new criterion, Client Orientation emerged out of three previous criteria identified from the literature. It refers to the accounting firm focusing in on the client's needs, problems and being proactive. This criterion was considered the second most important with a mean of 1.99. This is a new criterion not previously cited in the literature. Give the nature of professional services it is imperative that firms focus on their clients needs and develop a strategic client orientation.

The final two criteria only explained a small percentage of variance in the data but are important criteria. They also have emerged out of a number of previously identified criteria from the literature. Effective Preparation and Communication of Audit Submission was significantly more important (Table 2) to firms appointing a new auditor. It refers to the ability of the accounting firm to understand the needs of the company and incorporate these needs into a submission and then effectively presenting the submission. It could be perceived that this criterion would be important to all professional services given the high risk of purchasing an intangible service that cannot be fully experience until the service is completed. The final criterion Perceived Quality of Audit Service is more of a general criterion that relates to a number of the other identified criteria. It refers to the expertise of the audit staff, accuracy of service provided and understanding/knowing the client. In this study it ranked as the third most important criterion and there is no doubt that it is an important factor for all professional services.

These findings have identified a number of new choice criteria that are considered important in the audit/ accounting firm selection procedure. Two criteria identified in the literature, Credibility/ Ethics and Image are not directly identified as one of the new criteria, but do appear as underlying dimensions. The last item in both Factor 1 and 8, 'trust with confidential information' and 'honest answers to our enquiries' are underlying dimensions of the criterion Credibility and Ethics.

As stated in the literature, image is the 'total perception' a client has of the accounting firm and this perception is an amalgamation of all nine criteria that have been identified in this study. It is therefore appropriate not to find image as a separate criterion.

CONCLUSION AND IMPLICATIONS

There were nine choice criteria that decision making executives believe influence their company's selection or reappointment of an accounting firm to provide the mandated external audit service. Findings indicated that 'Technical Competence' followed by 'Client Orientation' were the two most important criteria influencing the decision process. The criteria 'Level of Audit Fee' and 'Effective Preparation and Communication of Audit Submission' were considered by executives appointing a new auditor to be more important than if the incumbent auditor was being reappointed. The implications of these latter findings should be of particular concern to accounting firms who are attempting to win new audit contracts. Accounting firms must focus their attention on preparing a client focused submission that meets the special requirements of that prospective client. An effective presentation explaining the services being offered and also provides the client with honest answers to their questions, is of critical importance to securing the audit contract. Segmenting the market on audit fee level may be a strategy by accounting firms if penetrating the audit market is an objective of the firm.

From a strategic perspective, the accounting firm must have an auditing team that has 'Technical Competence' that is, they have specialized knowledge and skills in the client's industry.

Employees of the accounting firm are an integral part of the strategic service mix. Their polite and considerate manner, acting promptly in relation to the client's needs and being very accessible to the client are important service marketing requirements sought by the client. The performance of auditing personnel also plays a crucial role in conveying an image of the service provided to current and potential clients. Auditing/ accounting personnel are a cue used by corporate executives to assess the auditing/ accounting services provided by the firm. One way that management of accounting firms can improve their image and client focus is through increased internal marketing to all staff levels. Increasing the awareness of staff as to the important role they play in securing audit contracts and maintaining existing ones is an initial communication strategy that should be implemented.

The findings and implications drawn from this study can be seen to be important for the selection of other services offered by the accounting firm and more broadly to the selection of other professional services.

Future research should focus on refining this instrument by testing it on other similar populations throughout the Asia Pacific region. Given the different environments (especially regulatory environments) which exist across countries, performing cross country comparisons will provide new insights to the auditor selection process. Another dimension that would be appropriate to address in relation to this research is the impact that relaxation of the rules of ethical conduct (REC 7) and professional codes of conduct (CPC section D) with regards to advertising, publicity and solicitation will have on choice criteria used by firms to select an external auditing service. Extending the study to incorporate other professional services would also make a significant contribution to the professional services literature.

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