butcher et al - 2012 - perceptions of audit service quality and auditor retention

Perceptions of Audit Service Quality
and Auditor Retention
ija_457 1 22
Kym Butcher,
1
Graeme Harrison
2
and Philip Ross
1
1
University of Western Sydney, Australia
2
Macquarie University, Australia
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.
Key words: Audit service quality, auditor retention, compulsory
audit tendering, local government audit, relationship
commitment in professional services
SUMMARY
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
Correspondence to: Kym Butcher, School of Accounting,
University of Western Sydney, Sydney, Australia. Email:

International Journal of Auditing doi:10.1111/j.1099-1123.2012.00457.x
Int. J. Audit. ••: ••–•• (2012)
ISSN 1090-6738

© 2012 Blackwell Publishing Ltd
constraints of unlimited tenure and high costs of
changing auditors in prior studies of auditor
retention in voluntary tendering contexts, and has
both 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 draw on the
marketing model used by Ismail et al. (2006) to
hypothesize a positive association between
perceived audit service quality and auditor
retention due to council satisfaction with audit
quality.
We use the audit service quality taxonomy of
Duff (2009) in confirmatory factor analysis, as well
as an exploratory factor analysis of the 48 attributes,
to generate factor scores to test the hypothesis in
logistic regression where the dependent variable
is auditor retention, measured as a dichotomous
decision, intention to retain or rotate the incumbent
auditor. We use the taxonomies of Carcello,
Hermanson and McGrath (1992) and Schroeder,
Solomon and Vickery (1986) in sensitivity analysis.
The study provides consistent evidence that
two of Duff’s (2009) four higher-order audit
quality factors, specifically, relationship (via the
expertise dimension) and service qualities (via the

responsiveness to client needs dimension), are of
paramount importance to clients when making
auditor retention decisions and, thus, worthy of
attention by audit firms in order to enhance client
commitment and their likelihood of being retained
as an incumbent auditor.
1. INTRODUCTION
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
(Hackenbrack & Hogan, 2005: 7). Duff (2009: 401)
argues that current issues of ‘the globalization of
business, commercialization of practice and
stakeholder dissatisfaction with the level of
audit quality are focusing auditors’ minds on
improving the quality of service they offer to their
clients’. Morton and Scott (2007: 18) argue that
clients’ perceptions of service quality are associated
with intentions or decisions to continue to
purchase services from the same provider.
Consequently, to improve their likelihood of being
retained, audit firms need to be concerned with
both the quality of services offered and clients’
perceptions of the quality of those services (Guy,
Harris & Williams, 1979: 17).
There is a considerable body of research on
perceptions of audit quality attributes (e.g.,
Schroeder et al., 1986; Carcello et al., 1992; Aldhizer,
Miller & Moraglio, 1995; Davis, 1995; Behn et al.,

1997; Chen, Shome & Su, 2001; Kilgore, 2010). There
have also been many studies that have examined
client perceptions of audit quality attributes
associated with auditor rotation and change
(e.g., Healy & Lys, 1986; Williams, 1988; Haskins &
Williams, 1990; Johnson & Lys, 1990; Woo & Koh,
2001), and auditor selection and appointment (e.g.,
George & Solomon, 1980; Addams & Davis, 1994;
Abbott & Parker, 2000; Velury, Reisch & O’Reilly,
2003; Godfrey & Hamilton, 2005). The consensus of
this literature is that dissatisfaction with the quality
of the incumbent auditor is the main reason for
auditor displacement (e.g., Burton & Roberts, 1967;
Bedingfield & Loeb, 1974; Williams, 1988; Beattie &
Fearnley, 1995; Behn et al., 1997).
The corollary to this finding is that if clients are
satisfied with, or have a favourable perception of,
certain audit quality attributes of their incumbent
auditor, they will remain with the incumbent
(Pandit, 1999). However, there is little empirical
research directly examining the audit quality
attributes associated with auditor retention
decisions. Apart from a small number of
practitioner studies (e.g., Stanny, Anderson &
Nowak, 2000; Rummel, Davidson & Action, 1999;
Gabhart & Miller, 1984), only Pandit (1999) and
Morton and Scott (2007) have examined directly the
association between client perceptions of audit
service quality attributes and auditor retention.
Pandit (1999) examined the association between

five dimensions of audit quality (the audit firm’s
responsiveness to client needs; industry expertise
of the audit firm; the audit firm’s executive
involvement in the audit; conduct of the audit
fieldwork; and quality of the audit staff) and client
intentions to remain loyal to, and retain, their
incumbent auditor. The five dimensions were
selected from the 12 factors identified by Carcello
et al. (1992) from their list of 41 attributes affecting
perceptions of audit quality. Pandit (1999) found
that two of the five dimensions (the audit firm’s
executive involvement and responsiveness to client
needs) were associated with the intention to retain
an incumbent auditor. Although hypothesized,
no association was found between the industry
2 K. Butcher et al.
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
expertise of the audit firm or the conduct of the
audit fieldwork and intention to retain the
incumbent auditor. The result for industry
expertise was acknowledged as contrary to prior
research (e.g., Shockley & Holt, 1983; Beattie &
Fearnley, 1995). It was not possible to test the
hypothesis for the quality of the audit staff because
of low factor loadings for this dimension.
Morton and Scott (2007) developed a 28-item
measure of audit service quality based on the
behavioural audit survey literature, exploratory
research and the SERVQUAL scale of Parasuraman,
Zeithaml and Berry (1985). Using a sample of 136

chief financial officers of Australian companies,
Morton and Scott (2007) found only a weak
association between perceived audit service quality
and retention of the auditor. They argued that this
result might be because there was no legislative
limit on auditor tenure and because the cost of
changing auditor is high.
The purpose of our study is to examine the
association between perceptions of audit service
quality attributes and auditor retention in a context
that comprises a high auditor retention rate and
client satisfaction with audit service quality, and
that also overcomes the limitations of Pandit (1999)
and Morton and Scott (2007). The context is that of
compulsory audit tendering (CAT) in New South
Wales (NSW) local government. In this context,
legislation, specifically the NSW Local Government
Act 1993, mandates tenders for audit services be
called by local councils every six years irrespective
of whether the council is satisfied or dissatisfied
with its incumbent auditor, or wants or intends to
change auditors (NSW Government, 1993, Sec. 423;
Butcher et al., 2011). The typical outcome of audit
tendering is auditor rotation (Butterworth &
Houghton, 1995), with the voluntary audit
tendering studies of Beattie and Fearnley (1998a,
1998b) and Johnson (1993) reporting rotation rates
of 82 per cent and 73 per cent, respectively.
However, a high rate of auditor retention exists
in the CAT context of NSW local government

with empirical research providing evidence that
despite the (compulsory) opportunity to rotate,
an increasing number of NSW local councils have
chosen to retain their audit firm, with the auditor
retention rate increasing from 59 per cent at the
time of the first compulsory tender in 1995 to 86 per
cent following the third (in 2007) (Butcher et al.,
2011). Further, Boon, McKinnon and Ross (2008)
found that NSW local councils reported high levels
of satisfaction with their audit service quality.
Additionally, the CAT context does not suffer the
constraints of no legislative limit on auditor tenure
and the high cost of changing auditor that Morton
and Scott (2007) argued might have confounded
their results and caused the weak association they
found between audit service quality and auditor
retention. First, CAT legislates a limit on auditor
tenure of six years. Second, as councils have to
call tenders every six years, the costs of tendering
and auditor bid evaluation and selection have to
be incurred irrespective of whether the council
reappoints its incumbent auditor or appoints a new
auditor. Our study also overcomes limitations of
Pandit (1999). As noted above, Pandit (1999) drew
on the 12 audit service quality factors of Carcello
et al. (1992), but selected only five for study. One of
the five (quality of the audit staff) could not be
tested because of low factor loadings and another
(industry expertise) produced results contrary to
prediction and prior research. We use the complete

list of attributes and factors from Carcello et al.
(1992). This allows a comprehensive examination of
the association between audit service quality and
auditor retention.
In summary, given the CAT context in NSW local
government of high auditor retention rates and
council satisfaction with audit quality, we use this
context to examine the association between audit
service quality and auditor retention. We use a
questionnaire survey of 48 audit service quality
attributes drawn from the literature and
administered to finance professionals and internal
auditors across all NSW local councils. We
formulate a hypothesis based on theory drawn
from the marketing model used by Ismail et al.
(2006) and on Duff’s (2009) AUDITQUAL measure
of audit quality. We find that audit firm expertise
and responsiveness to client needs are associated
with auditor retention and are, therefore,
important attributes for audit firms to focus on to
enhance the likelihood of being retained as the
incumbent auditor.
The paper is organized as follows. Section 2
provides background information on the CAT
context of NSW local government. Section 3 draws
on the audit service quality and marketing
literatures to formulate a hypothesis about the
association between audit quality attributes and
auditor retention. Sub-hypotheses are formulated
based on Duff’s (2009) AUDITQUAL model of

audit quality. Section 4 discusses the method,
including variable identification, survey design
and administration, sample selection, method of
Perceptions of Audit Service Quality and Auditor Retention 3
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
analysis and specification of the model to test the
hypothesis. Section 5 presents the results of testing
the hypothesis using AUDITQUAL. Section 6
presents the results of sensitivity analysis using
Carcello et al.’s (1992) audit quality attribute
categories as adapted by Behn et al. (1997), and
Schroeder et al.’s (1986) audit team and audit
firm attribute categories. Section 7 presents the
conclusions, limitations and suggestions for future
research.
2. BACKGROUND
This section provides demographic and descriptive
information on NSW local government, and
discusses the context of, and legislative
requirements for, local government auditing in
NSW.
New South Wales (NSW) is the most populous
of the eight states and territories in Australia,
having approximately one-third (7.24 million) of
the Australian population of 22.5 million. Although
the area of NSW is 800,000 km
2
, the population
density is just 8.44 per km
2

, with 63 per cent of
the population living in the state capital, Sydney,
and an urbanization rate of almost 80 per cent
(Wikipedia, 2011). There are 152 local councils in
NSW. Local councils are the third tier of
government in Australia, the first and second
being the federal and state/territory governments,
respectively. Councils are subject to state
government legislation; in the case of NSW by the
NSW Local Government Act 1993 administered by
the Division of Local Government, Department of
Premier and Cabinet.
Because of the demographics of the state, local
council populations and areas differ greatly with
an inverse ratio of population to area between
metropolitan (particularly Sydney) and rural
councils. The council with the highest resident
population of 300,000 (Blacktown City Council
within the Sydney metropolitan area) covers an
area of just 240 km
2
(a population density of 1,250
per km
2
), while the rural council of Urana has a
population of just 1,300 but an area of 3,357 km
2
(a population density of 0.38 per km
2
). The mean

populations are 47,000 for all councils, 106,700
for Sydney councils and 27,500 for non-Sydney
councils, Revenues correlate positively with
population and population density, with a
minimum of $5.9 million per annum (Urana), a
maximum of $457.8 million (Sydney City) and
a mean (median) of $61.6 million ($38 million)
(NSW Government, 2011).
Local councils are funded by their residential
and commercial constituents (the community)
through rates, user charges and fees (amounting
to about two-thirds of income from all sources),
and by the state government through general and
specific purpose grants (amounting to about
17 per cent of total income) (NSW Government,
2011). The community and government delegate
decision-making authority and responsibility to
council managers and directors (councillors)
for service provision within their areas and
constituencies, typically road and infrastructure
maintenance, community facilities (recreational,
parks, libraries), town planning and development
applications, and waste collection.
The Local Government Act 1993 provides a
number of mechanisms to monitor the
accountability of councils to their government and
community stakeholders. A major accountability
mechanism is the annual report and the associated
auditor’s report. Section 428 of the Local
Government Act requires councils to prepare

annual reports which include audited financial
statements. The Act requires that the council’s
annual report and audit report be submitted to the
Minister for Local Government and the Executive
of the Division of Local Government. Councils are
also required to present their audited financial
statements at a public council meeting no later than
five weeks after receipt of the audit report.
The legislative requirements for local council
auditing in NSW changed significantly in 1993
with the introduction of CAT under the NSW
Local Government Act of 1993, Section 422, and
following the recommendations of the 1991 Report
on the Audit of Local Government conducted by
the Public Accounts Committee (Parliament of
NSW, 1991). The Act (Section 424) described CAT as
the process whereby an open tender for audit
services is sought from qualified auditors every
six years, with the incumbent auditor eligible to
reapply. CAT was introduced to increase local
government accountability, and to increase the
competitiveness of the local government audit
market in order that councils could obtain the best
possible audit services in terms of costs and quality
(NSW Government, 1992: 8, 36). Prior to 1993, only
auditors holding a Local Government Auditing
Certificate were eligible to audit local councils. In
his submission to the 1991 Public Accounts
Committee, the NSW Auditor-General described
4 K. Butcher et al.

Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
the existing process of auditor appointment as
being ‘far too narrow and restrictive’.
In essence, it has created a ‘closed shop’
environment. Only auditors holding a Local
Government Auditing Certificate are eligible
for appointment and once appointed it is
very difficult to remove them, even where a
Council is dissatisfied with the service provided
(Parliament of NSW, 1991: 68).
CAT in the context of NSW local council audit
operationalizes the six criteria argued by the US
General Accounting Office (GAO) (1987) to be
desirable in audit procurement: competition,
solicitation, technical evaluation, a written
agreement, multi-year agreements, and specialized
finance professionals. CAT requires that audits are
put to competitive and open tender every six years;
tenderers are provided with a tender specification;
tender specifications state that councils are not
required to take the lowest bid and that both price
and service-based quality factors will be taken into
account; the tender specifications and engagement
letter form the basis of the audit contract;
appointment is for a mandated tenure period of six
years; and appointment decisions are made by a
tender committee comprising finance professionals
with extensive local government knowledge.
3. THEORETICAL FRAMEWORK AND
HYPOTHESIS DEVELOPMENT

3.1 Audit quality and audit service quality
Duff (2009: 401) notes that the literature does
not provide a consistent definition or
operationalization of audit quality. Perhaps the
most agreed upon definition is that of DeAngelo
(1981) who defines audit quality as the probability
that the auditor will both discover irregularities
and breaches (due to the auditor’s technical
competence) and report the irregularities and
breaches (due to the auditor’s independence).
There are various models used in the literature to
operationalize, or measure, audit quality (see
Francis, 2004 and Kilgore, 2007 for reviews of audit
quality research), including those that focus on the
service quality dimensions of audit quality.
As for audit quality, there is no consensus on
the conceptualization or operationalization of audit
service quality, as different researchers focus on
different models of service quality (Cronin & Taylor
1992; Ismail et al., 2006). Duff (2009: 401) states that
‘service quality can be thought of as a sustainable
means of providing clients with what they want
or need, better, and more effectively’. Prominent
examples of models of service quality used
in the auditing literature include SERVQUAL
(Parasuraman, Zeithaml & Berry, 1991),
AUDITQUAL (Duff, 2004, 2009), and models using
audit quality attributes, the three most significant
of which, according to Kilgore (2010), are
Schroeder et al. (1986), Carcello et al. (1992) and

Warming-Rasmussen and Jensen (1998).
Duff (2009) notes that although prior models
using audit quality attributes (such as
Schroeder et al., 1986; Carcello et al., 1992 and
Warming-Rasmussen & Jensen, 1998) contain
similar attributes, these models have been
developed and used in isolation from each
other. By contrast, Duff’s (2004, 2009) model,
AUDITQUAL, integrates the attributes from
the prior audit quality literature into a
multidimensional, structured model that has been
tested for its psychometric properties over different
time periods and samples, and has been found
to demonstrate both construct validity and
measurement equivalence as a measure of audit
quality. AUDITQUAL consists of nine dimensions
within four higher-order factors of competence,
independence, relationship and service qualities.
The competence factor relates to perceptions of
the auditor to detect errors and comprises three
dimensions of reputation, capability and assurance.
The independence factor is uni-dimensional, while
the relationship factor reflects the technical
qualities of the auditor and is two-dimensional,
comprising experience and expertise. The
fourth factor, service qualities, reflects the
‘often-unobserved nature’ of the auditor–client
relationship and comprises the three dimensions of
responsiveness, empathy and non-audit services
(Duff, 2009: 404).

3.2 The marketing model
Theoretically, we use the marketing model
employed by Ismail et al. (2006) who examined, for
500 publicly listed Malaysian companies, the
relationship between audit service quality, client
satisfaction and loyalty. The marketing model
postulates that these three elements are distinct and
that service quality leads to client satisfaction
which, in turn, leads to client loyalty (Ismail et al.,
2006: 742). Ismail et al. (2006: 739) cite Oliver’s
(1980) cognitive model of the antecedents of
Perceptions of Audit Service Quality and Auditor Retention 5
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
satisfaction decisions in the marketing literature
to argue that client satisfaction (or dissatisfaction)
‘results from experiencing a service and comparing
that experience with the kind of quality of service
that was expected’. Ismail et al. (2006: 741) also cite
Andreassen and Lindestad (1998) in the services
literature who argue that ‘customer satisfaction
is the accumulated experience of a customer’s
purchase and consumption experiences’. Rust and
Zahorik (1993), in the services literature, and
Storbacka, Strandvik and Gronroos (1994), in the
marketing literature, argue that satisfied customers
are more likely than dissatisfied customers to
remain loyal. Client satisfaction is seen as
mediating the association between service quality
and loyalty (Ismail et al., 2006: 744).
Empirical research in the marketing literature

has found support for this model. In reviewing
that literature, Ismail et al. (2006) cite studies that
provide consistent evidence that customer or client
satisfaction is affected by perceptions of service
quality (e.g., Yi, 1990), and that satisfaction is
positively associated with client loyalty (e.g., Stauss
& Neuhaus, 1997). Despite these findings, the
evidence concerning the association between
service quality and client loyalty is mixed in
the marketing literature, perhaps due to the
complexity of the loyalty construct and the
different ways of measuring the construct,
including cognitive, attitudinal and behavioural
measures (Ismail et al., 2006: 741). Studies in the
marketing area have found positive (Boulding
et al., 1993; Bloemer, de Ruyter & Wetzels, 1998),
negative (de Ruyter, Martin & Bloemer, 1998), and
no relationship (Cronin & Taylor, 1992) between
service quality and loyalty.
In the auditing literature, there is considerable
support for the model in terms of the relationship
between service quality and satisfaction. Attributes
of audit service quality have consistently being
found to be associated with customer satisfaction
(e.g., Behn et al., 1997, 1999; Samelson, Lowensohn
& Johnson, 2006; Boon et al., 2008), and service
quality (operationalized using Parasuraman et al.’s
(1991) SERVQUAL model) has also been found to
lead to client satisfaction (e.g., Ismail et al., 2006:
743).

With the exception of Ismail et al. (2006), however,
there is little research in the auditing literature on
the relationship between client satisfaction and
client loyalty. Additionally, there is little research
on the relationship between audit service quality
attributes and client loyalty expressed as auditor
retention. The research that exists shows mixed
results. Three practitioner studies (Gabhart &
Miller, 1984; Rummel et al., 1999; Stanny et al., 2000)
provide no common attributes. Rather, these studies
find a range of attributes associated with experience
with the incumbent auditor to be important,
including data processing capabilities and the
ability of the audit partner to communicate
effectively (Gabhart & Miller, 1984), staff
personalities and meeting deadlines (Rummel et al.,
1999) and overall quality of services (Stanny et al.,
2000).And, as noted in the introduction to thepaper,
the two academic studies of Pandit (1999) and
Morton and Scott (2007) that have examined the
relationship between audit service quality and
retention also provide mixed results.
Ismail et al. (2006) examined the relationship
between audit service quality, client satisfaction
and client loyalty. They hypothesized positive
relationships between service quality and
satisfaction and between satisfaction and loyalty,
arguing that clients who were satisfied with their
auditor would retain that auditor’s services for a
longer period and would buy additional non-audit

services from the auditor. Ismail et al. (2006) used
the five-dimensional marketing model SERVQUAL
(Parasuraman et al., 1991) to measure audit service
quality, with the five dimensions being tangibility,
reliability, responsiveness, assurance and empathy.
They used hierarchical regression to examine
the mediating effect of client satisfaction on the
association between audit service quality and
loyalty. They found that the service quality factors
of tangibility, reliability and empathy were
associated with satisfaction, satisfaction was
associated with client loyalty, and that satisfaction
partially mediated the relationship between audit
service quality and client loyalty via the reliability
dimension of the five-dimensional model (Ismail
et al., 2006: 750). Their finding supported the
conjecture that client satisfaction is a mediator ‘to
the extent that it carries the influences of audit
service quality to client loyalty’ (Ismail et al., 2006:
749).
3.3 Hypothesis
Based on the foregoing theory drawn from the
marketing model that service quality is associated
with client satisfaction and that satisfaction with
audit quality is associated with client loyalty (Ismail
et al., 2006), we expect a positive and significant
relationship between perceptions of audit service
6 K. Butcher et al.
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
quality and auditor retention in our context of

compulsory audit tendering (CAT) in NSW local
councils. This context has been demonstrated to be
one in which clients, local councils, are satisfied
with audit service quality (Boon et al., 2008), and
one in which the CAT regime is associated with
audit quality. CAT has been proposed as a means of
enhancing audit quality and auditor independence
by improving the information set available during
the auditor appointment process, and altering the
supply of audit firms available to an organization
from which to appoint an auditor (Jensen & Payne,
2005a, 2005b).
The six-year mandatory tenure period in the
NSW local council context is also associated
with audit quality because, while it means the
incumbent auditor should face no dismissal risk for
the period, at the end of the period the council
might not reappoint (retain) the incumbent, but
might change auditors, meaning that the quality of
the predecessor’s audit will be subject to scrutiny
(Vanstraelen, 2000). This scrutiny is likely to be
intense because new auditors have an incentive to
provide superior audit service in the initial years of
engagement to demonstrate their ability to deliver
a quality audit (Craswell, Francis & Taylor, 1995).
Our study employs the Duff (2009) model of
AUDITQUAL to hypothesize and measure
audit quality. We use AUDITQUAL because
of its theoretical properties as an integrated
multidimensional model of audit quality and

its psychometric properties of construct validity
and measurement equivalence. As noted earlier,
AUDITQUAL consists of nine dimensions
within four higher-order factors of competence,
independence, relationship and service qualities.
Our study also employs 48 individual audit quality
attributes drawn from the audit service quality
literature. The attributes allow us to hypothesize
and measure seven of the nine dimensions in
AUDITQUAL, including the three dimensions of
the competence factor (reputation, capability and
assurance), independence, the two dimensions of
the relationship factor (experience and expertise)
and one dimension of the service qualities factor
(responsiveness). The other two dimensions of this
factor (empathy and non-audit services) are not
measured within the 48 attributes and are not
hypothesized. We hypothesize as follows:
H
1
There is a significant and positive
relationship between perceptions of audit service
quality and auditor retention.
This overall hypothesis is stated as seven
sub-hypotheses using seven dimensions of Duff’s
(2009) four-factor model of audit service quality.
The sub-hypotheses are as follows:
H
1a
There is a significant and positive

relationship between reputation and auditor
retention.
H
1b
There is a significant and positive
relationship between capability and auditor
retention.
H
1c
There is a significant and positive
relationship between assurance and auditor
retention.
H
1d
There is a significant and positive
relationship between independence and auditor
retention.
H
1e
There is a significant and positive
relationship between experience and auditor
retention.
H
1f
There is a significant and positive
relationship between expertise and auditor
retention.
H
1g
There is a significant and positive

relationship between responsiveness and auditor
retention.
4. METHOD
4.1 Variable identification
Figure 1 provides a comprehensive list of 48
attributes drawn from the audit service quality
literature. The attributes are shown in Column 2
and the literature sources in Column 3. Figure 2
uses AUDITQUAL (Duff, 2009) to classify the
48 attributes into four higher-order categories
and seven sub-categories: (i) competence
(sub-categories of reputation, capability and
assurance), (ii) independence (sub-category of
independence), (iii) relationship (sub-categories of
expertise and experience) and (iv) service qualities
(sub-category of responsiveness).
Columns 1, 2 and 3 of Figure 2 show the category
name, sub-category number and sub-category
name, respectively. Column 5 shows the individual
attributes that are used in the survey questionnaire,
classified into the seven sub-categories and four
categories. Column 4 shows the numbering of the
attributes in the questionnaire. The numbers in
Perceptions of Audit Service Quality and Auditor Retention 7
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
Attribute
(survey item)
no.
Audit service quality attribute description Literature source
1 The audit firm has been performing the audit for at least 2–3 years Carcello et al. (1992), Chen et al. (2001)

2 The audit firm is considered to be a specialist in local government
audit
Carcello et al. (1992), Pandit (1999), Chen et al. (2001)
3 The audit engagement partner has been on the audit for at least 2–
3 years
Carcello et al. (1992)
4 The partner assigned to the audit engagement is very
knowledgeable about the industry
Carcello et al (1992), Behn et al. (1999), Pandit (1999),
Chen et al. (2001)
5 The audit firm participates in the peer review process, and its most
recent peer review report was a clean one
Schroeder et al. (1986), Carcello et al. (1992), Aldhizer et al.
(1995)
6 The audit firm actively encourages staff members to take courses
and attend seminars in fields where the firm has major clients
Schroeder et al. (1986), Carcello et al. (1992)
7 The audit firm that is conducting the audit provides no consulting
services for the client
Carcello et al. (1992), Chen et al. (2001)
8 The audit firm is skillful in devising acceptable accounting
treatments for transactions that generate results that council
management wants
Carcello et al. (1992), Pandit (1999), Chen et al. (2001)
9 The audit firm has a policy on the maximum number of hours per
day and per week that its staff can work
Carcello et al. (1992), Chen et al. (2001)
10 The audit firm develops stringent time budgets for each audit area
and expects its people to meet them
Carcello et al. (1992), Pandit (1999), Chen et al. (2001)

11 The audit firm has a high audit staff turnover rate Chen et al. (2001)
12 The audit firm conducts a thorough study of the client’s system of
internal control
Carcello et al. (1992), Davis (1995), Pandit (1999), Chen et
al. (2001)
13 The audit firm makes extensive use of computers in conducting
the audit
Carcello et al. (1992), Pandit (1999), Chen et al. (2001)
14 The audit firm’s attitude is one of a sceptic, not one of a client
advocate
Carcello et al. (1992), Behn et al. (1999), Pandit (1999),
Chen et al. (2001)
15 The audit firm is agreeable to completing the audit by a date the
client has set
Schroeder et al. (1986), Carcello et al. (1992), Davis (1995),
Pandit (1999)
16 The auditors assigned to the engagement are very knowledgeable
about accounting and auditing standards
Carcello et al. (1992), Davis (1995), Behn et al. (1999),
Pandit (1999)
17 The audit team members as a group always exercised due care
throughout the engagement
Behn et al. (1999)
18 The audit staff assigned to the engagement have very high ethical
standards
Carcello et al. (1992), Davis (1995), Behn et al. (1999),
Pandit (1999), Chen et al. (2001)
19 There is frequent communication between the audit team and the
council’s audit committee
Schroeder et al. (1986), Carcello et al. (1992), Behn et al.

(1999)
20 The audit firm conducting the audit has other local council audit
clients
Carcello et al. (1992), Aldhizer et al. (1995), Pandit (1999),
Chen et al. (2001)
21 Audit team members are rotated off the audit periodically Schroeder et al. (1986), Carcello et al. (1992), Chen et al.
(2001)
22 There is frequent communication between the audit team and
council management
Schroeder et al. (1986), Carcello et al. (1992), Davis (1995),
Pandit (1999), Chen et al. (2001)
23 The audit firm keeps council management informed during the
year about accounting and financial reporting developments that
affect the council
Carcello et al. (1992), Davis (1995), Chen et al. (2001)
24 The audit engagement partner and manager make frequent visits
to the council during the conduct of the audit
Carcello et al. (1992), Davis (1995), Pandit (1999)
25 The percentage that the council audit fee represents to the total
audit fee revenue of the audit firm is not material
Schroeder et al. (1986), Carcello et al. (1992), Chen et al.
(2001)
26 The personnel on the engagement below manager level have
passed the professional bodies’ exams
Carcello et al. (1992), Chen et al. (2001)
27 The audit partner on the engagement is a CA/CPA Carcello et al. (1992), Aldhizer et al. (1995)
28 Before accepting a new client, the CPA firm conducts a pre-
engagement investigation and goes through risk control
procedures including the conduct of a background search on
senior management of the prospective client

Carcello et al. (1992), Chen et al. (2001)
29 The audit firm reports internal control deficiencies and the
auditors’ recommendations on internal control are useful
Davis (1995)
30 The audit firm tends to have decentralized offices rather than
centralized offices
Carcello et al. (1992)
31 The overall reputation of the audit firm is positive Schroeder et al. (1986), Carcello et al. (1992), Chen et al.
(2001)
32 The work performed by inexperienced members of the audit team
is supervised by the audit team manager
Davis (1995)
8 K. Butcher et al.
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
Column 4 are not sequential as the attributes were
randomly distributed in the questionnaire.
4.2 Survey design
The survey questionnaire (designed following
Dillman’s (2000) Tailored Design Method)
consisted of two sections. The first section
provided respondents with the list of 48
attributes. Respondents were requested to:
‘Assume that you have been asked to evaluate the
quality of audit services provided by your
incumbent auditor. Please indicate the extent
to which you agree or disagree that each attribute
will impact on your evaluation of the quality of
audit services provided by your incumbent
auditor’. Consistent with Butcher et al. (2011) and
Beattie and Fearnley (1995), the request was

framed as a generic task in order that respondents
were not primed about the dependent variable of
the study (intention to retain the incumbent
auditor), and thus to avoid measurement
invariance (Brown, 2006) that might confound the
results of the study. A seven-point Likert-type
scale was used ranging from -3 (strongly disagree
that the attribute would impact their perceptions
of audit service quality) to +3 (strongly agree). The
order of the 48 attributes was randomized to
avoid any potential bias resulting from demand
characteristics or halo effect.
The second section of the questionnaire
contained demographic questions about the
respondent (e.g., extent of experience) and the
respondent’s council (e.g., size and location).
The final question asked respondents: ‘If your
council had to make an auditor appointment
decision now, would it prefer to (i) retain the
incumbent audit firm or (ii) appoint a new audit
firm?’. Responses to this question formed the
dependent variable of auditor retention.
We used preferred intention to retain or rotate
the incumbent auditor as the dependent variable
to reflect the dichotomous nature of the decision.
The demand-side studies of auditor selection also
use this dichotomy (e.g., Woo & Koh, 2001). A
measure of preferred outcome follows Pandit
(1999), and is based on research that shows
preference follows attitude and precedes

behaviour, and is a commonly used approach in
the broader behavioural literatures to measure the
33 In all your dealings with the audit firm and individual audit team
members, the audit firm and audit team members never engaged
in any actions that would compromise its/their independence,
either in fact or in appearance
Behn et al. (1999)
34 The audit firm has strict guidelines on the procedures that must be
completed before signing the audit report
Schroeder et al. (1986), Chen et al. (2001)
35 The cost to the audit firm of different audit procedures in terms of Carcello et al. (1992), Pandit (1999), Chen et al. (2001)
time expended is the major criterion as to whether a procedure is
used.
36 The audit firm has rarely been found negligent in lawsuits brought
against it (alleging inadequate audit performance)
Schroeder et al. (1986), Carcello et al. (1992), Chen et al.
(2001)
37 The audit team members as a group have an adequate
understanding of the operations of the council
Aldhizer et al. (1995), Sucher et al. (1998), Chen et al.
(2001)
38 The audit team members conducted the audit fieldwork in an
appropriate manner
Behn et al. (1999)
39 The audit firm makes extensive use of statistical techniques in
conducting the audit
Carcello et al. (1992), Pandit (1999), Chen et al. (2001)
40 The audit report and work papers receive a second partner review Aldhizer et al. (1995)
41 The auditor adds value to the entity in terms of generating useful
ideas for improvement

Davis (1995), Sucher et al. (1998)
42 The size of the audit firm in terms of its total revenue and number
of auditors is much larger than the average size in the region
Chen et al. (2001)
43 The audit manager has been on the audit for at least 2–3 years Carcello et al (1992), Chen et al. (2001)
44 The audit supervisor has been on the audit for at least 2–3 years Carcello et al (1992), Chen et al. (2001)
45 The audit manager and supervisor assigned to the engagement are
very knowledgeable about the industry
Carcello et al. (1992), Behn et al. (1999), Pandit (1999),
46 The auditors are mindful of how busy the council’s key finance
staff are and contact these individuals only to the extent necessary
Carcello et al. (1992), Pandit (1999), Chen et al. (2001)
47 The external auditors co-operate with the internal auditors Davis (1995)
48 The number of hours spent by the audit team to complete the audit
(from the beginning of fieldwork to the audit report date) is
commensurate with a quality audit.
Aldhizer et al. (1995)
Figure 1: Literature review – Audit service quality attributes.
Perceptions of Audit Service Quality and Auditor Retention 9
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
Category name Sub-category
number
Sub-category
name
Survey
attribute
no.
30
31
36

1 Reputation
42
10
12
13
17
26
27
29
35
37
38
39
2 Capability
48
5
6
9
11
21
28
32
34
Competence
3
Assurance
40
7
8
14

18
25
Independence 4 Independence
33
2
4
Relationship 5 Expertise
16
20
45
1
3
43
6 Experience
44
15
19
22
23
24
41
46
Service qualities 7
Responsiveness
47
Figure 2: Audit service quality taxonomy as per Duff (2009).
10 K. Butcher et al.
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
Survey item
The audit firm tends to have decentralized

offices rather than centralized offices
The overall reputation of the audit firm is positive
The audit firm has rarely been found negligent in lawsuits brought against it (alleging inadequate audit performance)
The size of the audit firm in terms of its total revenue and number of auditors is much
larger than the average size in the reg
ion
The audit firm develops stringent time budgets for each audit area and expects its people to meet them
The audit firm conducts a thorough study of the client’s system of internal control
The audit firm makes extensive use of computers in conducting the audit
The audit team members as a group always exercised due care throughout the engagement
The personnel on the engagement below manager le
vel have passed the professional bodies’ exams
The audit partner on the engagement is a CA/CPA
The audit firm reports internal control deficiencies and the auditors’ recommendations on internal control are useful
The cost to the audit firm of different audit procedures, in te
rms of time expended, is the major criterion as to whether a pro
cedure is
used
The audit team members as a group have an ade
quate understanding of the operations of the council
The audit team members conducted the aud
it fieldwork in an appropriate manner
The audit firm makes extensive use of statistical techniques in conducting the audit
The number of hours spent by the audit team to complete the audit (from the beginning of fieldwork to the audit report date) is
commensurate with a quality audit.
The audit firm participates in the p
eer review process, and its most recent peer review report was a clean one
The audit firm actively encourages staff members to take courses and attend seminars in fields where the firm has major clients
The audit firm has a policy on the maximum number of hours per day and per week that its staff can work
The audit firm has a high audit staff turnover rate

Audit team members are rotated off the audit periodically
Before accepting a new client, the CPA firm conducts a pre-engagement investigation and goes through risk control procedures
including the conduct of a background search on senior management of the prospective client
The work performed by inexperienced members of the a
udit team is supervised by the audit team manager
The audit firm has strict guidelines on the procedures that must be completed before signing the audit report
The audit report and work papers receive a second partner review
The audit firm that is conducting the audit provides no consulting services for the client
The audit firm is skillful in devising acceptable accounting treatments for transactions that generate results that council management
wants
The audit firm’s attitude is one of a sceptic, not one of a client advocate
The audit staff assigned to the engageme
nt have very high
ethical standards
The percentage that the council audit fee represents to the
total audit fee revenue of the audit firm is not material
In all your dealings with the audit firm and individual audit team members, the audit firm and audit team members never engaged in
any actions that would compromise its/their independence, either in fact or in appearance
The audit firm is considered to be a specialist in local government audit
The partner assigned to the audit engagement is very knowledgeable about the industry
The auditors assigned to the engagement are very knowledgeable about accounting and auditing standards
The audit firm conducting the audit has other local council audit clients
The audit manager and supervisor assigned to the e
ngagement are very knowledgeable about the industry
The audit firm has been performing the audit for at least 2–3 years
The audit engagement partner has been on the audit for at least 2–3 years
The audit manager has been on the audit for at least 2–3 years
The audit supervisor has been on the audit for at least 2–3 years
The audit firm is agreeable to completing
the audit by a date the client has set

There is frequent communication between the audit team and the council’s audit committee
There is frequent communication between the audit team and council management
The audit firm keeps council management informed during the year about accounting and financial re
porting developments that aff
ect
the council
The audit engagement partner and manager make frequent visits to the c
ouncil during the conduct of the audit
The auditor adds value to the
entity in terms of generating useful ideas for improvement
The auditors are mindful of how busy the council’s key finance st
aff are and contact these indivi
duals only to the extent necessary
The external auditors co-operate with the internal auditors
Figure 2: Continued
Perceptions of Audit Service Quality and Auditor Retention 11
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
likelihood of action (Pandit, 1999: 176). The
dependent variable is referred to as auditor
retention hereafter.
4.3 Sample selection and survey
administration
The survey was administered to the sample of 235
finance professionals who attended the National
Local Government Finance Professionals’ Biennial
Conference held in NSW in May 2006, and via mail
to the population of 35 NSW council internal
auditors. These two groups were identified by
the NSW Division of Local Government as the
most appropriate respondents for the study as they

liaise closely with the external auditors during the
audit of the council’s financial statements and are
involved in providing recommendations for
the auditor appointment decision. The finance
professionals are all senior accountants from Chief
Financial Officer down to senior supervisors in
charge of an area of finance. Finance professionals
work with the auditors during the audit and are
involved in the auditor appointment process
as members of the tender committee that
recommends appointment to Council. Many
councils do not have an internal audit function
(hence the small number in the sample). However,
when they do, the internal auditors are also
members of the tender committee. Council finance
professionals and internal auditors have equivalent
accounting qualifications, comparable familiarity
and liaison with the external auditors during the
audit, and involvement in the auditor appointment
decision. Hence, the two groups are combined in
the analysis. The analysis was also conducted
excluding the responses from internal auditors. The
results were unchanged.
The time of data collection (May 2006) was
towards the end of the second compulsory tender
period. The first tender period since the
introduction of CAT was 1 July 1995 to 30 June
2001, and the second from 1 July 2001 to 30 June
2007. Hence, data collection occurred at the
beginning of the final year of the second, six-year

mandatory tenure period. The respondents,
therefore, had at least five years’ experience with
their incumbent auditors.
4.4 Response rate
Of the 235 finance professionals attending the
conference, 207 responded. Of the 207, 22 were
excluded because they were from states other than
NSW, resulting in 185 responses from finance
professionals in NSW local councils. Of the 35
NSW internal auditors, 28 responded. Overall, 213
responses were received for a response rate
of 86 per cent. Given the high response rate,
non-response bias was not considered a threat to
the validity of the results.
In some cases, more than one finance
professional from the same council attended the
conference and completed the questionnaire. This
is not a concern for the results as the focus of
the study is at the individual level, specifically
the perceptions of finance professionals within
councils, not the council level. Also the finance
professionals were from different functions (e.g.,
Revenue Accountants, Expenditure Accountants,
Tax Accountants) and likely to have different
interactions with the external auditors and, hence,
different perceptions of audit service quality and
attributes affecting audit service quality. Of the
population of 152 NSW local councils, 88 (58%)
were represented at the conference.
4.5 Method of analysis

The data were analysed using two approaches.
First, a forced confirmatory factor analysis was
conducted for each of the attribute categories
shown in Column 3 of Figure 2 (i.e., the Duff (2009)
taxonomy). Principal components extraction with
Varimax (Kaiser Normalization) rotation was used
and the factor loading cut-off was 0.30. Each factor
was converted into a single factor score (following
Field, 2000). The factor scores were then used in a
logistic regression as predictor variables explaining
intention to retain or rotate the incumbent auditor.
Forced confirmatory factor analysis was used
as it provides factors coterminous with the
attribute taxonomy and allows testing of the
hypotheses. Confirmatory factor analysis removes
within-attribute collinearity, although not between-
attribute collinearity. Its purpose is to reduce
predictor variables to a subset of uncorrelated
factors (Field, 2000: 431–2).
Second, exploratory factor analysis was
performed on all 48 items. This approach identifies
a parsimonious list of uncorrelated factors based
upon a principal components analysis of all items.
Exploratory factor analysis achieves parsimony by
explaining the maximum amount of common
variance in a correlation matrix using the smallest
number of explanatory concepts (factors) (Field,
12 K. Butcher et al.
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
2000: 423). These factors are then included in a

logistic regression explaining rotation/retention.
Exploratory factor analysis was performed using
the principal components extraction method with
Varimax (Kaiser Normalization) rotation. Six
factors were extracted based on (i) scree plot
analysis and (ii) an absolute value coefficient cut-off
of 0.50. (The cut-off point for selecting the number
of factors is based on the point of inflexion of the
scree plot, which graphs the value of each
eigenvalue against the factor with which it is
associated; Field, 2000: 436.) The six-factor solution
explains 45.52 per cent of the variance among the
items. Figure 3 summarizes these six factors,
providing a subjective factor (or attribute) label
based on each factor’s constituent items. Those
constituent items with factor loadings greater than
0.50 are shown in Figure 3, together with the factor
loadings for each item.
4.6 Model specification
The auditor choice models to be estimated are as
follows:
Intention to retain Reputation
Capability Assuran
=+ +
+
ββ
ββ
01
23
cce Independence

Expertise Experience Responsivene
++
++
β
ββ β
4
56 7
sss e+
[1]
where: Intention to retain = categorical dependent
variable, coded 1 for intention to retain, 0
otherwise, and the independent variables are
continuous independent variables; factor scores
derived from factor analysing attributes
comprising the corresponding audit quality
categories of Duff (2009) shown in Figure 2,
Column 3.
Intention to retain
Expertise and responsiveness
As
=+
+
β
β
β
0
1
2
ssurance Quality control policies
Independence and reput

/ +
β
3
aation Experience
Expertise Communication e
++
++
β
ββ
4
56
[2]
where: Intention to retain = categorical dependent
variable, coded 1 for intention to retain, 0
otherwise, and the independent variables are
continuous independent variables; factor scores
derived from performing an exploratory factor
analysis as shown in Figure 3.
5. RESULTS
Panel A of Table 1 presents the results of
independent t-tests of differences in perceptions
of audit service quality of each of the seven
attribute sub-categories of Duff (2009) between
respondents preferring to retain their incumbent
auditor (retainers) and those preferring to
rotate (rotators). Panel B of Table 1 presents
corresponding results for the six attribute
categories produced by the exploratory factor
analysis. Panel A of Table 1 shows that the
t-statistics (two-tailed) for Capability (t = 4.437,

p = 0.000), Expertise (t = 4.452, p = 0.000) and
Responsiveness (t = 6.191, p = 0.000) are positive
and significant, indicating that these attribute
categories had a greater impact on perceptions of
audit service quality for retainers compared to
rotators. Panel B of Table 1 shows similar results
with t-statistics (two-tailed) for Expertise and
Responsiveness (t = 5.373, p = 0.000), Expertise
(t = 2.782, p = 0.006), and Communication (t =
3.106, p = 0.002) being positive and significant.
To test the hypothesis, the factor scores for the
seven attribute sub-categories (Duff, 2009) were
included in a logistic regression explaining auditor
retention/rotation. The results are presented in
Panel A of Table 2. The logistic regression is
significant overall (Chi-squared statistic = 32.931,
prob < 0.000) and the Nagelkerke R
2
is 24.6%.
Panel A of Table 2 shows that the coefficients
for Expertise (Wald = 3.098, p = 0.078) and
Responsiveness (Wald = 11.576, p = 0.001) are
positive and significant, indicating that these
attribute sub-categories had a greater impact on
perceptions of audit service quality for retainers
compared to rotators.
Panel B of Table 2 presents corresponding results
for the six attribute categories produced by the
exploratory factor analysis. The logistic regression
is significant overall (Chi-squared statistic = 42.022,

prob < 0.000) and the Nagelkerke R
2
is 30.7%.
Panel B of Table 2 shows similar results to those
in Panel A with the coefficients for Expertise
and Responsiveness (Wald = 19.645, p = 0.000),
Expertise (Wald = 8.126, p = 0.004) and
Communication (Wald = 9.804, p = 0.002) being
positive and significant.
The results provide support for two of the seven
sub-hypotheses. The results show that industry
expertise of the audit firm and audit firm
responsiveness to the client were important
considerations in intended auditor retention
Perceptions of Audit Service Quality and Auditor Retention 13
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
An exploratory factor analysis was conducted on all 48 items. A scree plot revealed a six-factor score solution. The extraction method is
principal components analysis. The orthogonal rotation method used is Varimax with Kaiser Normalization. The numbers in parentheses after
the attribute descriptions are the factor loadings from the pooled factor analysis. Factor loadings were suppressed at 0.50.
Expertise and responsiveness (15.16%)
Attribute no. Attribute description

37 The audit team members as a group have an
adequate understanding of the operations of the
council (0.808)

41 The auditor adds value to the entity in terms of
generating useful ideas for improvement(0.785)
45 The audit manager and supervisor assigned to the
engagement are very knowledgeable about the

industry (0.766)
29 The audit firm reports internal control deficiencies
and the auditor’s recommendations on internal
control are useful (0.765)

38 The audit team members conducted the audit
fieldwork in an appropriate manner (0.732)

16 The auditors assigned to the engagement are very
knowledgeable about accounting and auditing
standards (0.683)

23 The audit firm keeps council management informed
during the year about accounting and financial
reporting developments that affect the council

22 There is frequent communication between the audit
team and council management(0.604)
12 The audit firm conducts a thorough study of the
client’s system of internal control (0.531)
32 The work performed by inexperienced members of
the audit team is supervised by the audit team
manager (0.523)
15 The audit firm is agreeable to completing the audit
by a date the client has set (0.510)
Kaiser-Meyer-Olkin Measure of Sampling Adequacy = 0.704
Bartlett’s test of Sphericity: Approx Chi-square = 609.042 (Sig = 0.000)
Independence and reputation (6.98%)
Attribute no. Attribute description
33

In all your dealings with the audit firm and

individual team members, the audit firm and

audit team members never engaged in any actions

that would compromise its/their independence

either in fact or in appearance (0.683)

18

The audit staff assigned to the engagement

have very high ethical standards (0.619)
36

The audit firm has rarely been found negligent in

lawsuits brought against it (alleging inadequate

audit performance) (0.573)
17

The audit team members as a group always exercised

due care throughout the engagement (0.560)
31

The overall reputation of the audit team is

positive (0.542)
34

The audit firm has strict guidelines on the

procedures that must be completed before signing

the audit report (0.534)
Kaiser-Meyer-Olkin Measure of Sampling Adequacy = 0.822
Bartlett’s test of Sphericity: Approx Chi-square = 395.224 (Sig = 0.000)
Experience (6.44%)
Attribute no. Attribute description
43

The audit manager has been on the audit for at least

2–3years (0.821)
44

The audit supervisor has been on the audit for at least

2–3years (0.728)
3

The audit engagement partner has been on the audit for

at least 2–3years (0.506)
1

The audit firm has been performing the audit for

at least 2–3years (0.506)
Kaiser-Meyer-Olkin Measure of Sampling Adequacy = 0.500
Bartlett’s test of Sphericity: Approx Chi-square = 30.159 (Sig = 0.000)
Expertise (5.23%)
Attribute no. Attribute description
4

The partner assigned to the audit engagement is very

knowledgeable about the industry(0.612)
2

The audit firm is considered to be a specialist in local

government audit (0.599)
20

The audit firm conducting the audit has other local council

audit clients (0.546)
Kaiser-Meyer-Olkin Measure of Sampling Adequacy = 0.729
Bartlett’s test of Sphericity: Approx Chi-square = 291.276 (Sig = 0.000)
Communication (4.25%)
Attribute no. Attribute description
19

There is frequent communication between the

audit team and the council’s audit committee (0.560)
Kaiser-Meyer-Olkin Measure of Sampling Adequacy = 0.585
Bartlett’s test of Sphericity: Approx Chi-square = 72.685 (Sig = 0.000)
Assurance/Quality control policies (7.46%)
Attribute no. Attribute description
9

The audit firm has a policy on the maximum number

of hours per day and per week that its staff can work

(0.697)
10

The audit firm develops stringent time budgets for each

audit area and expects its people to meet them (0.556)

35

The cost to the audit firm of different audit procedures in

terms of time expended is a major criterion as to whether a
procedure is used (0.537)

21

Audit team members are rotated off the audit

periodically(0.508)

5

The audit firm participates in the peer review process and

its most recent peer review report was a clean one (0.501)
Kaiser-Meyer-Olkin Measure of Sampling Adequacy = 0.780
Bartlett’s test of Sphericity: Approx Chi-square = 979.790 (Sig = 0.000)
Figure 3: Audit service quality attribute categories based on exploratory factor analysis.
14 K. Butcher et al.
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
decisions. These attribute categories were
significant in both the analysis based on the audit
service quality taxonomy of Duff (2009) and the
analysis based on the factor structure from the
exploratory factor analysis.
6. SENSITIVITY ANALYSIS
Sensitivity analysis was conducted using two
alternative measures of audit service quality: (i)
the 12 factors (attribute categories) of Carcello
et al. (1992), as adapted by Behn et al. (1997) and
operationalized by Boon et al. (2008) (hereafter
referred to as Carcello et al., 1992), and (ii) the
15 audit quality attributes identified by Schroeder
et al. (1986). Kilgore (2010: 29) notes that these
are two of the most prominent taxonomies of
audit quality in the literature.
Forced confirmatory factor analyses were
conducted for each of the taxonomies (principal

components extraction with Varimax (Kaiser
Normalization) rotation and a factor loading
cut-off of 0.50). Factors were converted into
factor scores which were then used in logistic
regressions as predictor variables explaining
intention to retain or rotate the incumbent
Table 1: Results of t-tests of mean differences between potential retainers and rotators
Panel A
Factor scores
a
Mean value of factor scores
a
t-statistic Significance
(2-tailed)
b,c
Potential retainers
[Coded 1] (n = 164)
Potential rotators
[Coded 0] (n = 37)
Reputation 0.089 -0.389 2.662 0.008
Capability 0.142 -0.630 4.437 0.000*
Assurance 0.055 -0.246 1.661 0.098
Independence 0.084 -0.373 2.549 0.012
Expertise 0.143 -0.632 4.452 0.000*
Experience 0.041 -0.180 1.212 0.227
Responsiveness 0.190 -0.844 6.191 0.000*
a
Each of the attributes comprising the categories reported in Figure 2, Column 3, were forced into one factor. The
categories were based on Duff’s (2009) audit service quality taxonomy. The orthogonal rotation method used is
Varimax with Kaiser Normalization.

b
Bonferroni corrections were made for the seven multiple comparisons, thus factors scores are significant at
p < 0.007, two-tailed. Significant differences are marked with an asterisk.
c
A positive (negative) t-statistic that is significant (p < 0.007, two-tailed) indicates that the variable has a greater
impact on perceptions of audit quality for retainers (rotators).
Panel B
Factor scores
a
Mean value of factor scores
a
t-statistic Significance
(2-tailed)
b,c
Potential retainers
[Coded 1] (n = 164)
Potential rotators
[Coded 0] (n = 37)
Expertise and responsiveness 0.169 -0.747 5.373 (0.000)*
Assurance/Quality control policies -0.038 0.170 -1.148 (0.252)
Independence and reputation 0.001 -0.002 0.016 (0.987)
Experience 0.011 -0.051 0.342 (0.733)
Expertise 0.092 -0.406 2.782 (0.006)*
Communication 0.102 -0.452 3.106 (0.002)*
a
An exploratory factor analysis was conducted on all 48 items. A scree plot revealed a six-factor score solution.
Results of the exploratory factor analysis are shown in Figure 3. The extraction method is principal components
analysis. The orthogonal rotation method used is Varimax with Kaiser Normalization.
b
The Bonferroni correction for the six multiple comparisons was performed with factor scores being significant

at p < 0.008, two-tailed. Significant comparisons are marked with an asterisk.
c
A positive (negative) t-statistic that is significant (p < 0.008, two-tailed) indicates that the variable has a greater
impact on perceptions of audit quality for retainers (rotators).
Perceptions of Audit Service Quality and Auditor Retention 15
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
Table 2: Logit model relating audit service quality attributes to intention to retain the incumbent auditor
(categorical dependent variable, that is intention to retain the incumbent audit firm, coded 1, versus
intention to rotate audit firm, coded 0)
Panel A
Factor scores
a
Coefficient Wald statistic Significance (2-tailed)
b,c
Reputation 0.190 0.654 0.419
Capability -0.309 0.853 0.356
Independence -0.077 0.099 0.753
Expertise 0.409 3.098 0.078*
Experience 0.000 0.000 0.998
Responsiveness 1.003 11.576 0.001***
Constant 1.768 63.149 0.000
a
Each of the attributes comprising the categories reported in Figure 2, Column 3, were forced into one factor. The
categories were based on Duff’s (2009) audit service quality taxonomy. The orthogonal rotation method used is
Varimax with Kaiser Normalization. The category Assurance was removed from the logistic regression due to
multicollinearity concerns.
b
*Significant at the 10% level, **Significant at the 5% level, ***Significant at the 1% level.
Sample size: 201
Correct classification: 81.6%

Chi-squared statistic = 32.931; prob < 0.000
Nagelkerke R
2
: 24.6%
where: Intention to retain = Categorical dependent variable, coded 1 for intention to retain, 0 otherwise, and
Independent variables = Continuous independent variables; factor scores derived from factor analysing
attributes comprising the Duff (2009) categories.
c
A positive (negative) coefficient that is significant (p < 0.10, two-tailed) indicates that the variable has a greater
impact on perceptions of audit quality for retainers (rotators).
Panel B
Factor scores
a
Coefficient Wald statistic Significance (2-tailed)
b,c
Expertise and responsiveness 0.875 19.645 0.000***
Assurance/Quality control policies -0.305 2.210 0.137
Independence and reputation 0.022 0.012 0.912
Experience 0.107 0.273 0.601
Expertise 0.564 8.126 0.004**
Communication 0.670 9.804 0.002**
Constant 1.882 61.207 0.000
a
An exploratory factor analysis was conducted on all 48 items. Results are shown in Figure 3. The extraction
method is principal components analysis. The orthogonal rotation method used is Varimax with Kaiser
Normalization.
b
*Significant at the 10% level, **Significant at the 5% level, ***Significant at the 1% level.
Sample size: 201
Correct classification: 81.6%

Chi-squared statistic = 42.022; prob < 0.000
Nagelkerke R
2
: 30.7%
where: Intention to retain = Categorical dependent variable, coded one for intention to retain, zero otherwise,
and Independent variables = Continuous independent variables; factor scores derived from factor analysing
attributes as shown in Figure 3.
c
A positive (negative) coefficient that is significant (p < 0.10, two-tailed) indicates that the variable has a greater
impact on perceptions of audit quality for retainers (rotators).
16 K. Butcher et al.
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
auditor. In cases where an attribute category
contained a single attribute, the attribute
mean score was used in the logistic regression
models.
Two auditor choice models were estimated.
Model 3 is based on the Carcello et al. (1992)
taxonomy, and Model 4 is based on the Schroeder
et al. (1986) taxonomy. The auditor choice models
estimated were as follows:
Intention to retain Client experience
Industry expe
=+ +
ββ
β
01
2
rrtise Responsiveness
Technical competence Independe

++
+
β
ββ
3
45
nnce
Due care Quality commitment
Executive involveme
+
++
ββ
β
67
8
nnt Fieldwork conduct
Audit committee Ethical stan
++
+
β
ββ
9
10 11
ddards
Scepticism Freshness of perspective
Degree
+
++
ββ
β

12 13
14
of individual responsibility e+
[3]
where: Intention to retain = categorical dependent
variable, coded 1 for intention to retain, 0
otherwise, and the independent variables are
continuous independent variables; factor scores
derived from factor analysing attributes
comprising the corresponding attribute categories,
or attribute mean scores where the attribute
category contained a single attribute. Single
attribute categories are Due care, Executive
involvement and Audit committee.
Intention to retain
Provision for team rotation
Ski
=+
+
β
β
β
0
1
2
llls and experience
Communication team and management
+
+
β

β
3
4
AAudit planning and conduct
Quality control Location a
+
+
ββ
56
nnd size
Litigation Professional development
Signifi
+
++
ββ
β
78
9
ccance of fees Peer review
Communication team and au
++
β
β
10
11
ddit committee
Partner and manager attention
Experti
+
+

β
β
12
13
sse Independence
Reputation e
++
+
β
β
14
15
[4]
where: Intention to retain = categorical dependent
variable, coded 1 for intention to retain, 0
otherwise, and the independent variables are
continuous independent variables; factor scores
derived from factor analysing attributes
comprising the corresponding attribute categories,
or attribute mean scores where the attribute
category contained a single attribute. Single
attribute categories are Litigation, Professional
development, Significance of fees, Peer review,
Communication team and audit committee, Partner
and manager attention, and Reputation.
For purposes of exposition, figures and tables
detailing the classification of the 48 items and the
t-test and logistic regression results for the two
alternative taxonomies are not shown here. In
summary, the results of the two sensitivity analyses

support those from the main analyses. Using the
taxonomy of Carcello et al. (1992), the attribute
categories of Industry expertise (Wald = 6.678,
p = 0.010) and Responsiveness (Wald = 11.594,
p = 0.001) were positive and significant, indicating
that these attribute categories had a greater impact
on perceptions of audit service quality for retainers
compared to rotators. Additionally, the attribute
category Independence was also positive and
significant (Wald = 5.095, p = 0.024). The logistic
regression model was significant overall
(Chi-squared statistic = 56.927, prob < 0.000) and
the Nagelkerke R
2
was 38.8%.
Using the 15 attributes of Schroeder et al.
(1986), the attributes of Expertise (Wald = 3.624,
p = 0.057), Communication (between) audit team
and management (Wald = 7.065, p = 0.008), Audit
planning and control (Wald = 8.525, p = 0.004) and
Significance of fees (Wald = 9.471, p = 0.002) were
positive and significant, indicating greater impact
on perceptions of audit service quality for retainers
compared to rotators. While Significance of fees
was positive and significant, the attribute was ‘the
percentage that the council audit fee represents to
the total audit fee revenue of the audit firm’. This
attribute relates to the dependence of the auditor
on the council for total fee revenue. Hence, the
significance of this attribute supports the finding

for Independence in the analysis based on Carcello
et al. (1992). The logistic regression model was
significant overall (Chi-squared statistic = 59.964,
prob < 0.000) and the Nagelkerke R
2
was 41.9%.
7. CONCLUSIONS, LIMITATIONS AND
FUTURE RESEARCH
The purpose of this study was to examine the
association between perceived audit quality
attributes and the auditor retention decision. We
used the CAT context of NSW local government
because of prior research evidence of council
satisfaction with audit quality (Boon et al., 2008)
Perceptions of Audit Service Quality and Auditor Retention 17
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
and a high auditor retention rate (Butcher et al.,
2011). We administered a survey questionnaire
consisting of 48 audit quality attributes to NSW
local council finance professionals and internal
auditors. Using the marketing model as a
theoretical basis and Duff’s (2009) AUDITQUAL
measure of audit quality, we hypothesized a
positive relationship between perceived audit
quality and auditor retention due to perceived
satisfaction with audit service quality.
We found that two dimensions of audit quality,
i.e., expertise and responsiveness to client needs,
were, as expected, positively associated with
auditor retention in the main analyses using the

audit quality taxonomy of Duff (2009) and the
exploratory factor structure of the 48 audit quality
attributes. We corroborated these findings in both
the sensitivity analyses using the taxonomies of
Carcello et al. (1992) and Schroeder et al. (1986). The
other five dimensions of Duff’s (2009) audit quality
dimensions; i.e., reputation, capability, assurance,
independence and experience, were, contrary to
expectations, not found to be associated with
auditor retention.
We provide support for prior studies. Morton
and Scott (2007) hypothesized an association
between audit service quality and auditor
retention but found the association to be weak.
Consistent with their hypothesis, we find a
significant association in our context that did not
suffer the constraints of no legislative limit on
auditor tenure and the high cost of changing
auditor that Morton and Scott (2007) argued
might have confounded their results. Consistent
with Pandit (1999), we find that responsiveness
to client needs is positively associated with
auditor retention, implying that client-focused
attention significantly improves the likelihood of
relationship commitment by the client and hence
auditor retention. In addition, we find that the
audit quality dimension of expertise is positively
associated with auditor retention. Thus we
find support for the extensive audit quality
literature advocating the importance of auditor

specialization in both providing quality audits and
maintaining client satisfaction and, thus, long
tenures with audit clients.
In relation to Duff’s (2009) higher-order audit
quality model, we find support for positive
associations between two of the four higher-order
audit quality factors and auditor retention,
specifically the relationship factor (via the expertise
dimension) and service qualities (via the
responsiveness dimension), indicating that these
dimensions are of paramount importance to audit
firms seeking to increase their likelihood of being
retained as an incumbent auditor.
The findings of non-significant associations
between auditor retention and Duff’s (2009)
higher-order audit quality factors of independence
and reputation may indicate that these quality
factors are relatively more important to clients in
the initial selection of an auditor, or in a decision
to change audit firms to properly align auditor–
client needs. This conjecture is supported by
Butcher et al.’s (2011) finding that reputation and
independence are significant considerations in
the auditor choice decision in the context of
compulsory audit tendering.
A limitation of our study is that we used a
dichotomous dependent variable as a proxy for
auditor retention, specifically, preferred intention
to retain the incumbent auditor or rotate to a new
auditor. This is consistent with the decision that has

to be made in practice which is also a dichotomous
decision, and has literature support and precedent
in prior studies. However, a dichotomous measure
precludes analysis based on strength of preference
that may have allowed finer insights into the
attributes affecting the preference. Additionally, we
used preferred intention to proxy for the actual
decision. While this has support in the behavioural
literature that shows intention follows attitude and
precedes behaviour, it remains a proxy and may
introduce error into the measure of the dependent
variable. A further limitation is that, like prior
studies, our study is cross-sectional and relies on
self-reported response data gathered by survey
questionnaire and is, therefore, subject to the
normal limitations of self-report data. Future
research could use alternative theoretical models
and measures of audit quality, and could use
different methods (such as client interviews). As
there is still relatively little research in this area,
future studies will be fruitful in understanding the
association between audit service quality attributes
and auditor retention.
Our results have implications for audit firms
in practice, both in the audit services market for
NSW local government and more generally in local
government and the private sector. For firms
operating, or seeking to operate, in the NSW local
government audit market, our results provide
direct evidence that council commitment to, and

retention of, an audit firm is related to specific
attributes of audit service quality, specifically audit
18 K. Butcher et al.
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
firm responsiveness to client needs and industry
expertise.
The results are also meaningful for local
government audit generally. As discussed in
Section 2, compulsory audit tendering was
introduced to NSW local councils in 1993 with the
objectives of increasing competitiveness in the
local government audit market and to allow
councils to obtain the best possible audit services
in terms of cost and quality. Its introduction was
in response to the pre-existing system ‘of virtual
lifetime appointment for Local Government
auditors [that] had led to a “cosy” relationship
between auditors and management and to a
professional cartel whose fee structure could only
be influenced from within’ (Parliament of NSW,
1991: xi).
Prior research has shown that the introduction
of compulsory audit tendering achieved the
objectives of increasing competitiveness and
decreasing fees (Boon et al., 2005). However, a
concern with increased competitiveness and
downward pressure on fees is potential
compromise of audit service quality through
decreased audit effort and quality. Our results
suggest that audit service quality is not

compromised in this context as we find that it is
attributes associated with audit quality that have
greater impact on evaluations of audit service for
clients (here, councils) intending to retain their
auditor. This adds to, and is consistent with, prior
research in the NSW local government context that
found that when clients (councils) were motivated
to change their auditor, the change was to appoint
a quality auditor proxied by competence,
reputation and independence (Butcher et al., 2011).
The meaning of these findings for local
government audit is that compulsory audit
tendering appears to have been successful in
achieving both the cost competitiveness and audit
service quality objectives underpinning its
introduction in 1993. This finding is important for
local government more generally, and for the
private sector. At the local government level, NSW
was the only jurisdiction in Australia to introduce
compulsory audit tendering as a means of
improving audit service quality and auditor
independence. Other jurisdictions adopted other
means. South Australia, for example, stipulated a
five-year term of tenure after which the incumbent
could be reappointed (without tender), but
required that any member of the audit team who
had been involved in the audit for the past five
years could take no part in the audit for a further
two years (South Australia Government, 1999). In
the private sector, both Australia (CLERP 9,

Commonwealth of Australia, 2004) and the US
(Sarbanes-Oxley Act, 2002) also introduced
compulsory audit partner rotation to improve
auditor independence and audit quality following
the corporate collapses of the early 2000s.
However, there is growing concern about the
ability of audit partner rotation to provide
adequate protection against loss of audit quality
and auditor independence. Evidence from the US
and Australia is that quality and independence
remain potentially compromised because of the
continuing dependence of the audit firm on the
client for fees, and the fact that rotation applies
to lead and review partners only, while the
remainder of the team that conducts the audit
continues unchanged (Durie, 2011; McKenna,
2011). As such, the objective of bringing ‘fresh
eyes’ to scrutinize the financial statements and
activities of the client is not achieved. As a
consequence, the debate about the effectiveness of
auditor partner rotation is currently being
revisited, with European authorities arguing for a
review of audit firm rotation as an alternative to
partner rotation (Durie, 2011; McKenna, 2011).
The results of our paper are, therefore, able to be
extrapolated beyond the specific context of NSW
local government and to local government more
generally and to the private sector. Should audit
partner rotation not prove effective, as appears to
be the growing concern, the debate on alternative

mechanisms needs to consider compulsory audit
tendering as well as audit firm rotation. Our
findings support compulsory audit tendering
with a mandated tenure period as a means of
auditor procurement that may prove effective in
enhancing and maintaining audit and audit
service quality.
ACKNOWLEDGEMENTS
The authors acknowledge the contribution of the
late Jill McKinnon to this research. We also
acknowledge the support provided by the NSW
Division of Local Government, Department of
Premier and Cabinet, Local Government Finance
Professionals, NSW and the NSW Local
Government Internal Audit Network. We are
grateful for comments from two anonymous
reviewers and participants at the University of
Western Sydney, School of Accounting, Seminar
Perceptions of Audit Service Quality and Auditor Retention 19
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
Series in October 2009 and participants at the
Australian National Centre for Audit Research
conference in December 2011.
REFERENCES
Abbott, L. J. & Parker, S. (2000), ‘Auditor selection and
audit committee characteristics’, Auditing: A Journal
of Practice & Theory, Vol. 19, No. 2, pp. 47–66.
Addams, H. L. & Davis, B. (1994), ‘Why the fastest
growing companies in America hired and fired their
auditors. Privately held companies report reasons

for selection and switching’, CPA Journal, Vol. 64,
August, pp. 38–41.
Aldhizer, G. R., Miller, J. R. & Moraglio, J. F. (1995),
‘Common attributes of quality audits’, Journal of
Accountancy, Vol. 179, No. 1, pp. 61–68.
Andreassen, T. W. & Lindestad, B. (1998), ‘Customer
loyalty and complex services: The impact of
corporate image on quality, customer satisfaction
and loyalty for customers with varying degrees of
service expertise’, International Journal of Service
Industry Management, Vol. 9, No. 1, pp. 7–23.
Beattie, V. A. & Fearnley, S. (1995), ‘The importance of
audit firm characteristics and the drivers of auditor
change in UK listed companies’, Accounting and
Business Research, Vol. 25, Autumn, pp. 227–39.
Beattie, V. A. & Fearnley, S. (1998a), ‘Audit market
competition: Auditor changes and the impact of
tendering’, British Accounting Review, Vol. 30, No. 3,
pp. 261–89.
Beattie, V. A. & Fearnley, S. (1998b), ‘Auditor changes
and tendering: UK evidence’, Accounting, Auditing
& Accountability Journal, Vol. 11, No. 1, pp. 72–98.
Bedingfield, J. P. & Loeb, S. E. (1974), ‘Auditor changes
– an examination’, Journal of Accountancy, Vol. 137,
No. 3, pp. 66–69.
Behn, B. K., Carcello, J. V., Hermanson, D. R. &
Hermanson, R. H. (1997), ‘The determinants of
audit client satisfaction among clients of Big 6
firms’, Accounting Horizons, Vol. 11, March, pp. 7–24.
Behn, B. K., Carcello, J. V., Hermanson, D. R. &

Hermanson, R. H. (1999), ‘Client satisfaction and
big 6 audit fees’, Contemporary Accounting Research,
Vol. 16, No. 4, pp. 587–608.
Bloemer, J., de Ruyter, K. & Wetzels, M. (1998),
‘Linking perceived service quality and service
loyalty: A multi-dimensional perspective’, European
Journal of Marketing, Vol. 33, No. 11/12, pp.
1082–106.
Boon, K., Crowe, S., McKinnon, J. & Ross, P. (2005),
‘Compulsory audit tendering and audit fees:
Evidence from Australian local government’,
International Journal of Auditing, Vol. 9, No. 3, pp.
221–41.
Boon, K., McKinnon, J. & Ross, P. (2008), ‘Audit
service quality in compulsory audit tendering:
Preparer perceptions and satisfaction’, Accounting
Research Journal, Vol. 21, No. 2, pp. 93–122.
Boulding, W., Kalra, A., Staelin, R. & Zeithaml, V.
(1993), ‘A dynamic process model of service quality:
From expectations to behavioral intentions’, Journal
of Marketing Research, Vol. 30, No. 1, pp. 7–27.
Brown, T. A. (2006), Confirmatory Factor Analysis for
Applied Research, New York: Guildford.
Burton, J. C. & Roberts, W. (1967), ‘A study of auditor
changes’, Journal of Accountancy, Vol. 123, No. 4, pp.
31–36.
Butcher, K., Harrison, G., McKinnon, J. & Ross, P.
(2011), ‘Auditor appointment in compulsory audit
tendering’, Accounting Research Journal, Vol. 24, No.
2, pp. 104–49.

Butterworth, S. & Houghton, K. A. (1995), ‘Auditor
switching: The pricing of audit services’, Journal of
Business Finance & Accounting, Vol. 22, No. 3, pp.
323–44.
Carcello, J. V., Hermanson, R. H. & McGrath, N. T.
(1992), ‘Audit quality attributes: The perceptions of
audit partners, preparers, and financial statement
users’, Auditing: A Journal of Practice & Theory, Vol.
11, No. 1, pp. 1–15.
Chen, C. J. P., Shome, A. & Su, X. (2001), ‘How is audit
quality perceived by Big 5 and local auditors in
China? A preliminary investigation’, International
Journal of Auditing, Vol. 5, No. 2, pp. 157–75.
Commonwealth of Australia (2004), Corporate Law
Economic Reform Program – Audit Reform and
Corporate Disclosure (CLERP 9).
Craswell, A. T., Francis, J. R. & Taylor, S. L. (1995),
‘Auditor brand name reputations and industry
specialisations’, Journal of Accounting and Economics,
Vol. 20, No. 3, pp. 297–322.
Cronin, J. J. & Taylor, S. A. (1992), ‘Measuring service
quality: A re-examination and extension’, Journal of
Marketing, Vol. 56, No. 7, pp. 55–68.
Davis, D. (1995), ‘Contracts for public sector audits
in New Zealand’, unpublished Master of
Business Studies thesis, Massey University, New
Zealand.
DeAngelo, L. E. (1981), ‘Auditor size and audit
quality’, Journal of Accounting and Economics, Vol. 3,
No. 3, pp. 183–99.

de Ruyter, K., Martin, W. & Bloemer, J. (1998), ‘On the
relationship between perceived audit quality,
service loyalty and switching costs’, International
Journal of Service Industry Management, Vol. 9, pp.
436–53.
Dillman, D. A. (2000), Mail and Internet Surveys: The
Tailored Design Method, New York: Wiley.
Duff, A. (2004), AUDITQUAL: Dimensions of Audit
Quality, Edinburgh: Institute of Chartered
Accountants of Scotland.
Duff, A. (2009), ‘Measuring audit quality in an era of
change: An empirical investigation of UK audit
market stakeholders in 2002 and 2005’, Managerial
Auditing Journal, Vol. 24, No. 5, pp. 400–22.
Durie, J. (2011), ‘Corporate cop ASIC takes on
auditors’, The Australian, 30 June.
Field, A. (2000), Discovering Statistics using SPSS for
Windows, London: Sage Publications.
20 K. Butcher et al.
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
Francis, J. R. (2004), ‘What do we know about audit
quality?’, The British Accounting Review, Vol. 36, pp.
345–68.
Gabhart, D. R. L. & Miller, G. (1984), ‘Survey of local
governments’ selection practices’, Governmental
Finance, March, pp. 13–17.
General Accounting Office (1987), CPA Audit Quality:
A Framework for Procuring Audit Services,
Washington, DC: General Accounting Office.
George, W. and Solomon, P. (1980), ‘Marketing

strategies for improving practice development’,
Journal of Accountancy, February, pp. 79–84.
Godfrey, J. M. & Hamilton, J. (2005), ‘The impact of
R&D intensity on demand for specialist auditor
services’, Contemporary Accounting Research, Vol. 22,
No. 1, pp. 55–93.
Guy, D. M., Harris, P. E. & Williams, D. Z. (1979),
‘Client perceptions of a local CPA firm’, The CPA
Journal, March, pp. 17–22.
Hackenbrack, K. & Hogan, C. (2005), ‘Client retention
and engagement-level pricing pressures’, Auditing:
A Journal of Practice & Theory, Vol. 24, No. 1, pp.
7–20.
Haskins, M. E. & Williams, D. D. (1990), ‘A contingent
model of intra-big eight auditor changes’, Auditing:
A Journal of Practice & Theory, Vol. 9, No. 3, pp.
55–74.
Healy, P. & Lys, T. (1986), ‘Auditor changes following
big eight mergers with non-big eight firms’, Journal
of Accounting & Public Policy, Vol. 5, No. 4, pp.
251–65.
Ismail, I., Haron, H., Ibrahim, D. N. & Isa, S. M. (2006),
‘Service quality, client satisfaction and loyalty
towards audit firms’ perceptions of Malaysian
public listed companies’, Managerial Auditing
Journal, Vol. 21, No. 7, pp. 738–56.
Jensen, K. L. and Payne, J. L. (2005a), ‘Audit
procurement: managing audit quality and audit fees
in response to agency costs’, Auditing: A Journal of
Practice & Theory, Vol. 24, No. 2, pp. 27–48.

Jensen, K. L. and Payne, J. L. (2005b), ‘The introduction
of price competition in a municipal audit market’,
Auditing: A Journal of Practice & Theory, Vol. 24, No.
2, pp. 137–52.
Johnson, R. F. (1993), ‘The effect of tendering on audit
fees and other services’, unpublished MEc
dissertation, University of New England, NSW,
Australia.
Johnson, W. B. & Lys, T. (1990), ‘The market for audit
services: evidence from voluntary auditor changes’,
Journal of Accounting & Economics, Vol. 12, Nos. 1–3,
pp. 281–308.
Kilgore, A. (2007), ‘Corporate governance, professional
regulation and audit quality’, Malaysian Accounting
Review, Vol. 6, No. 1, pp. 65–83.
Kilgore, A. (2010), ‘The relative importance of
audit-team and audit-firm factors in perceptions of
audit quality’, unpublished PhD thesis, Macquarie
University, Sydney, Australia.
McKenna, F. (2011), ‘Auditor rotation proposal just
more spin’, Storify, 19 August. Available at:
/>proposal-just-more-spin (accessed on 21 May 2012).
Morton, A. & Scott, D. (2007), ‘The association
between perceived audit firm service quality and
behavioural intentions’, The Journal of Contemporary
Issues in Business and Government, Vol. 13, No. 2, pp.
17–30.
New South Wales (NSW) Government (1992), The
Local Government Bill – extract from Legislative
Assembly Hansard, 27 November, pp. 1–49.

NSW Government (1993), The Local Government Act,
No. 30.
NSW Government (2011), Snapshot of NSW Local
Government: Comparative Information on NSW
Local Government Councils 2009–10. Department
of Premier and Cabinet, Division of Local
Government. Available at: .
gov.au/dlg/dlghome/documents/Comparatives/
Comparatives_2009_10.pdf (accessed on 25
September 2011).
Oliver, R. L. (1980), ‘A cognitive model of the
antecedents and consequences of satisfaction
decisions’, Journal of Marketing Research, Vol. 17, No.
11, pp. 460–9.
Pandit, G. M. (1999), ‘Clients’ perceptions of their
incumbent auditors and their loyalty to the audit
firms: An empirical study’, The Mid-Atlantic Journal
of Business, Vol. 35, No. 4, pp. 171–88.
Parasuraman, A., Zeithaml, V. A. & Berry, L. L. (1985),
‘A conceptual model of service quality and its
implications for future research’, Journal of
Marketing, Vol. 49, No. 4, pp. 41–50.
Parasuraman, A., Zeithaml, V. A. & Berry, L. L. (1991),
‘Refinement and reassessment of the SERVQUAL
scale’, Journal of Retailing, Vol. 67, No. 4, pp. 420–
50.
Parliament of New South Wales (1991), Report on the
Auditing of Local Government. Public Accounts
Committee of the Forty-Ninth Parliament. Report
Number 53, January, Sydney: NSW Public Accounts

Committee, Parliament House.
Rummel, A., Davidson, S. & Action, D. (1999), ‘Getting
new clients and keeping old ones’, The CPA Journal,
Vol. 69, No. 4, pp. 56–57.
Rust, R. T. & Zahorik, A. J. (1993), ‘Customer
satisfaction, customer retention and market
share’, Journal of Retailing, Vol. 69, No. 2, pp.
193–215.
Samelson, D., Lowensohn, S. & Johnson, L. E. (2006),
‘The determinants of perceived audit quality and
auditee satisfaction in local government’, Journal
of Public Budgeting, Accounting & Financial
Management, Vol. 18, No.2, pp. 139–66.
Sarbanes-Oxley Act, 2002. Public Law No. 107-204.
Washington, DC: Government Printing Office.
Schroeder, M. S., Solomon, I. & Vickery, D. (1986),
‘Audit quality: The perceptions of audit-committee
chairpersons and audit partners’, Auditing: A Journal
of Practice & Theory, Vol. 5, No. 2, pp. 86–93.
Shockley, R. A. & Holt, R. N. (1983), ‘A behavioral
investigation of supplier differentiation in the
Perceptions of Audit Service Quality and Auditor Retention 21
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd
market for audit services’, Journal of Accounting
Research, Vol. 21, No. 2, pp. 545–64.
South Australia Government (1999), The Local
Government Act.
Stanny, E., Anderson, S. & Nowak, L. (2000),
‘Contributing factors in the selection and retention
of local accounting firms’, National Public

Accountant, Vol. 45, No. 4, pp. 19–21.
Stauss, B. & Neuhaus, P. (1997), ‘The qualitative
satisfaction model’, International Journal of Service
Industry Management, Vol. 8, pp. 236–49.
Storbacka, K., Strandvik, T. & Gronroos, C. (1994),
‘Managing customer relationships for profit: the
dynamics of relationship quality’, International
Journal of Service Industry Management, Vol. 5, No. 5,
pp. 21–38.
Vanstraelen, A. (2000), ‘Impact of renewable long-term
audit mandates on audit quality’, European
Accounting Review, Vol. 9 No. 3, pp. 419–42.
Velury, U., Reisch, J. T. & O’Reilly, D. M. (2003),
‘Institutional ownership and the selection of
industry specialist auditors’, Review of Quantitative
Finance & Accounting, Vol. 21, No. 1, pp. 35–48.
Warming-Rasmussen, B. & Jensen, L. (1998), ‘Quality
dimensions in external audit services – An external
user perspective’, The European Accounting Review,
Vol. 7, No. 1, pp. 65–82.
Wikipedia (2011). New South Wales. Available at:
/>(accessed on 25 September 2011).
Williams, D. D. (1988), ‘The potential determinants
of auditor change’, Journal of Business Finance &
Accounting, Vol. 15, No. 2, pp. 243–61.
Woo, E-S. & Koh, H. C. (2001), ‘Factors associated with
auditor changes: a Singapore study’, Accounting and
Business Research, Vol. 31, No. 2, pp. 133–44.
Yi, Y. (1990), ‘A critical review of consumer
satisfaction’, in Zeithaml, V.A. (ed.), Review of

Marketing, Chicago, IL: American Marketing
Association.
AUTHOR PROFILES
Kym Butcher is Lecturer in Accounting at the
University of Western Sydney.
Graeme Harrison is Professor Emeritus of
Accounting at Macquarie University.
Philip Ross is Associate Professor at the School
of Accounting at the University of Western Sydney.
22 K. Butcher et al.
Int. J. Audit. ••: ••–•• (2012)© 2012 Blackwell Publishing Ltd