Bidding on new audit clients: Avoiding the winner’s curse

Alan Blankley, Jason MacGregor and Michael J. Mowchan

Business Horizons, 2021, vol. 64, issue 1, 107-117

Abstract: GE’s recent announcement that it was placing its 2020 audit out for tender has shone a spotlight on the audit bidding process and the possibility that auditors could fall prey to a phenomenon known as the winner’s curse when bidding on new clients. In this article, we begin by describing the winner’s curse utilizing an example that highlights how its primary features influence the likelihood of bidder’s experiencing it. Then, we discuss how the winner’s curse uniquely applies to the audit bidding process and develop a descriptive table through which to analyze key differences between these settings. Last, we overlay the winner’s curse onto the various cost considerations firms assess in preparing their audit bids. Our goal is to assist auditors in preparing bids that accurately reflect the costs of conducting an audit with a deeper knowledge of features that can lead to the winner’s curse.

Keywords: Winner’s curse; Optimism; Lowballing; Audit risk; Reputation risk; Opportunity cost (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:bushor:v:64:y:2021:i:1:p:107-117

DOI: 10.1016/j.bushor.2020.09.006

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