Determinants and Consequences of Selecting an Industry Specialist Auditor in the Nonprofit Sector

• In Event: Research Paper Session—Accounting History and Non-Profit

Abstract

This paper extends our understanding of nonprofit auditor choice and audit quality by examining the nature of auditor industry specialization in the nonprofit sector. We find that industry specialist auditor choice among nonprofit organizations is associated with lower agency costs and lower governance quality (lower leverage, lower executive compensation, less board independence, more reliance on government grants and program service revenues). We also find that the choice of industry specialist is associated with lower direct donations and higher government grants in the following year. This is to be expected as the nonprofits in our sample receive and expend a significant amount of government grants. The increase in government grants is a positive consequence of choosing an industry specialist auditor. Our results also show that the determinants and consequences of nonprofit selection of industry specialist auditors vary significantly from those associated with Big 4 audit firm selection. This indicates that differentiating nonprofit auditors across industry specialization within local areas provides an incremental contribution to understanding nonprofit audit quality beyond the Big 4 definition used in prior literature.

Authors

• Aleksandra B Zimmerman, Case Western Reserve University

• Stefanie Tate, University of Massachusetts Lowell

• Erica Harris, Rutgers University - Camden