Audit Specialization, Perceived Audit Quality, and Audit Fees in the Local Government Audit MarketJournal of Accounting and Public Policy Lowensohn, S; Johnson, L; Elder, R; and Davies, S.
2007
Authors from the College of Business:
Suzanne Lowensohn and Laurence E. Johnson, Associate Professors of Accounting
Local government revenues neared $1.5 trillion in 2005-6 (U.S. Census 2007), yet audits of local governments have proved problematic for decades. In this study, we ask the following questions: Are audit firms that specialize in governmental audits, based upon practical experience gained from auditing multiple governments, positively associated with perceived audit quality? Are large public accounting firms associated with higher perceived audit quality? Do specialized or large audit firms charge higher audit fees? We find that auditors who specialize in governmental audits are associated with higher quality audits as perceived by governmental finance officials. Further, our results show that the quality advantage offered by specialized auditors does not entail a higher cost to the auditee, possibly resulting from economies of scale in the provision of audit services. While more-specialized audit firms do not charge higher audit fees, large international audit firms were found to charge premium audit fees. This study suggests that governments may find it advantageous to appoint specialist auditors from both a quality and a cost perspective.