Factors Influencing External Compliance Costs in Small and Mid-Sized Municipalities—A Study of Connecticut Towns

• In Event: 2.02 Government Research Concurrent Session: Governance/Audit

Abstract

This paper examines audit fees paid by 96 small and midsized towns in Connecticut that utilize the Annual Comprehensive Financial Report (ACFR) for their annual required financial reporting. The setting of small and midsized towns and the drivers of audit fees is of interest since millions of Americans rely on their local governments to provide essential services while these same citizens utilize the audited financial statements to assess the spending patterns and economic health of their town. With most Americans living in small and mid-sized towns, the cost of compliance and the drivers contributing to this cost have been largely overlooked in the study of governments, resulting in little awareness of the cost to taxpayers for municipal assurance services.

We chose to utilize agency theory as the theoretical basis for our study as local governments manage a series of complex agency relationships amongst the grant making authorities, bonding agencies, rating agencies, and their resident constituents. The role of financial statements (based on agency theory) is to help reduce agency costs between the principal (the public, elected officials, bureaucrats, etc.) and the agent (elected officials, bureaucrats, etc.) by providing transparent and accessible data on the sources and uses of funds. Voters, bureaucrats, elected officials, bonding agencies, and grant making entities are all consumers of municipal financial statements and utilize these statements based on their specific needs and agendas. The key to the usefulness of these financial statements for the user community is their accuracy, completeness, timeliness, and integrity as reviewed and attested to by certified public accountants.

As a part of their operational mandate, municipalities are expected to provide transparent and timely reporting designed to inform, educate, and update the various constituencies they serve. Building on past research on audit fee determinants, we examined the cost drivers associated with the local entity municipal audits utilizing recent data from 2019 year-end reporting; gathered directly from local and state data sources. The impact of oversite committees, revenue sources (as reported in the General Fund), fund balances, post-employment benefits, and bond rating were examined to determine the impact on audit fees of small and midsized towns in Connecticut. The findings can be generalized to gain insight on the variables impacting external audit fees. In addition, by studying audit fee drivers, opportunities for cost reduction or avoidance can be utilized by local governments as they assess the impact of recent pressures on their financial stability.

Authors

• Jacqueline Tahminey Jamsheed, Central Connecticut State University

• Marc Lewis, Central Connecticut State University

• Joseph Patton, Florida Atlantic University