Audit Quality, Audit Pricing, and Nonaudit Services in the North Carolina Municipal Audit Market

• In Event: Audit Quality

Abstract

We analyze the effects of audit pricing and the provision of nonaudit services on audit quality for North Carolina municipal governments. We use a unique data set that includes the pricing for auditor services including bookkeeping fees, financial statement preparation fees, and the extent of upcharges on the audit contract. We measure audit quality based on receipt of a GFOA Certificate of Achievement for Excellence in Financial Reporting and whether the audit received a letter from North Carolina Treasurer’s office indicating nonconformance in the audit report. Audit quality is positively associated with abnormal audit fees and audit firms that belong to the AICPA Governmental Audit Quality Center. Although auditor changes are associated with lower fees, they are not significantly associated with audit quality. Audit quality is negatively associated with charges for financial statement preparation and additional charges beyond the original audit contact. Charges for bookkeeping are associated with lower audit fees while upcharges are associated with higher audit fees, indicating that additional billing are not substituting for low initial fees. Whether an audit firm is associated with nonaudit services varies by audit firm specialization.

Authors

• Alfred Yebba, SUNY-Binghamton

• Randal J Elder, University of North Carolina Greensboro

• Ayalew A Lulseged, University of North Carolina-Greensboro