CLIENT-AUDITOR REALIGNMENT AND RESTRICTIONS ON AUDITOR SOLICITATION

We compare clients' realignment decisions in markets permitting direct uninvited solicitation (allowed markets) and markets prohibiting such practices (banned markets), providing insight into the effects of inc reased competition on client-auditor alignment, We argue that solicita tion influences realignment decisions if clients do not invite nonincu mbents to submit proposals, and if net economies are available (i. e., the cost savings from switching auditors exceeds any transactions cos ts incurred in realignment), By examining realignments among Big 8 aud itors during the period 1980 through 1988, and by controlling for othe r variables associated with auditor switching, we are able to focus on the effects of solicitation in a setting of homogeneous audit quality and diversity in state boards' direct solicitation rules. We find tha t realignment occurs more frequently in the allowed market than in the banned market, Thus, in markets where auditors are allowed to approac h prospective clients with proposals, clients become better informed a nd the outcome may be reduced inefficiencies.