Literature review The demand for external auditing derives largely from the agency costs created by relationships between managers and parties internal and external to their organizations (Jensen and Meckling 1976). Unfortunately, while different levels of agency costs may lead to different levels of audit quality being demanded, audit quality is difficult to identify ex ante (or ex post). This makes it difficult for managers to regulate the level of audit quality they purchase, thus making it difficult to optimize the overall level ofcontrol provided by an organization‟s control sys tem. This also makes it difficult for manager s to match desired audit quality with appropriate levels of audit fees. Consequently, external audit quality for many organizations may be less than optimal (GAO 1986), and audit fees for some organizations may be higher than would occur if better information sets were available during auditor selection (Hackenbrack, Jensen, and Payne 2000). Both the General Accounting Office (GAO 1987) and the American Institute ofCertified Public Accountants (AICPA 1987) strongly suggest that the solution to this problem is improved audit procurement. Procurement experts voice similar opinions (e.g., Gansler 2002). And recent commentary from other professional organizations indicates that using audit procurement to improve audit quality and to meet organizational needs continues to be emphasized to their constituents (e.g., FEI 2003; GFOA 2002; IIA 2002). Procurement is, “[T]he systematic process of deciding what, when, and how much to purchase; the act of purchasing it; and the process of ensuring that what is required is received on time in the quantity and quality specified (Burt and Pinkerton 1996 ).” Unfortunately, auditprocurement and its role are not well understood, and empirical research examining audit procurement antecedents and the links between audit procurement, audit quality, a nd audit fees is limited. Since the general focus of procurement is quality, we predict that managers facing higher levels of agency costs are more likely to implement well- developed procurement mechanisms, and that well-developed procurement helps them to identify and hire their preferred quality auditor at an appropriate cost. This study addresses these issues by presenting a multidimensional model of audit procurement. According to this model, a well-developed procurement process can be an effective mechanism for
