Auditor specialization, perceived audit quality, and audit fees in the local government audit market

Abstract Prior governmental research implies a positive relation between auditor specialization and audit quality, but the effect of specialization on audit fees is mixed. However, no single governmental study investigates the effect of auditor specialization on both audit quality and audit fees. Also, prior studies focus on either large- or small audit firms and often employ indirect proxies for audit quality. We study the effects of auditor specialization on perceived audit quality and audit fees. Our data represent both Big 5 and smaller audit firms and include three market-based measures of specialization. We survey 241 Florida local government finance directors and find that specialization is positively associated with perceived audit quality but not with audit fees. We also find that Big 5 auditors, often used as a proxy for higher audit quality in prior research, are not uniformly associated with increased perceived audit quality but consistently charge higher audit fees. Our results confirm a relation between measures of audit firm specialization and audit quality and raise questions regarding audit firm size and audit quality in the municipal sector. Our findings suggest that engaging specialized auditors may be good policy for many local governments.

[1]  D. Simunic.  The Pricing Of Audit Services - Theory And Evidence , 1980 .

[2]  Gary A Giroux,et al.  The effect of auditor changes on audit fees, audit hours, and audit quality , 1996 .

[3]  J. Hausman.  Specification tests in econometrics , 1978 .

[4]  E. Imhoff.  The relation between perceived accounting quality and economic characteristics of the firm , 1992 .

[5]  Brian W. Mayhew,et al.  Audit Firm Industry Specialization as a Differentiation Strategy: Evidence from Fees Charged to Firms Going Public , 2002 .

[6]  Robert Libby,et al.  Experience And The Ability To Explain Audit Findings , 1990 .

[7]  Andrew Ferguson,et al.  The Effects of Firm‐Wide and Office‐Level Industry Expertise on Audit Pricing , 2003 .

[8]  Randal J. Elder.  A comment on "audit quality in audits of federal programs by non-federal auditors" , 1997 .

[9]  Vanishree K. null,et al.  Logit and Probit: Ordered and Multinomial Models , 2001 .

[10]  Jacqueline S. Hammersley.  Pattern Identification and Industry‐Specialist Auditors , 2006 .

[11]  N. Nagelkerke,et al.  A note on a general definition of the coefficient of determination , 1991 .

[12]  Derek K. Chan.  “Low-Balling” and Efficiency in a Two-Period Specialization Model of Auditing Competition* , 1999 .

[13]  Robert Libby,et al.  Judgment and decision-making research in accounting and auditing: The role of knowledge and memory in audit judgment , 1995 .

[14]  M. Firth.  Price setting and the value of a strong brand name , 1993 .

[15]  Joseph V. Carcello,et al.  The Determinants of Audit Client Satisfaction Among Clients of Big 6 Firms , 1997 .

[16]  J. Kao,et al.  Competition and Big-Six Brand Name Reputation: Evidence from the Ontario Municipal Audit Market , 2000 .

[17]  A. N. Oppenheim.  Questionnaire Design and Attitude Measurement , 1966 .

[18]  T. L. Neal,et al.  Auditor Industry Specialist Research Design , 2004 .

[19]  L. DeAngelo,et al.  Auditor size and audit quality , 1981 .

[20]  Robert H. Ashton,et al.  Judgment and decision-making research in accounting and auditing: Acknowledgments , 1995 .

[21]  F. Hodge,et al.  Investors' Perceptions of Earnings Quality, Auditor Independence, and the Usefulness of Audited Financial Information , 2003 .

[22]  Charles E. Davis,et al.  Quality Review, Continuing Professional Education, Experience and Substandard Performance: An Empirical Study , 1999 .

[23]  Roger H. Hermanson,et al.  Audit Quality Attributes: The Perceptions of Partners, Preparers, and Financial Statement Users , 1992 .

[24]  Kevan L. Jensen,et al.  The effect of a bidding restriction on the audit services market , 2000 .

[25]  David R. Cox.  The analysis of binary data , 1970 .

[26]  Kevan L. Jensen,et al.  The Introduction of Price Competition in a Municipal Audit Market , 2005 .

[27]  Laurence E. Johnson,et al.  LOCAL GOVERNMENT AUDIT PROCUREMENT REQUIREMENTS, AUDIT EFFORT, AND AUDIT FEES , 2003 .

[28]  P. McCullagh.  Regression Models for Ordinal Data , 1980 .

[29]  Charles P. Cullinan.  Reply to Discussant's Comments on "Evidence of Non-Big 6 Market Specialization and Pricing Power in a Niche Assurance Service Market" , 1999 .

[30]  Laurence E. Johnson,et al.  The effect of seasonal variations in auditor workload on local government audit fees and audit delay , 2002 .

[31]  Jere R. Francis,et al.  What Matters in Audit Pricing: Industry Specialization or Overall Market Leadership? , 2006 .

[32]  Susan L. Swanger,et al.  The Effect of Internal Audit Outsourcing on Financial Analysts' Perceptions of External Auditor Independence , 2001 .

[33]  Paul A. Copley.  The Association Between Municipal Disclosure Practices and Audit Quality , 1991 .

[34]  P. McCullagh,et al.  Generalized Linear Models , 1992 .

[35]  Darius P. Miller,et al.  Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market , 2004 .