An Empirical Investigation of the Market for Audit Services in the Public Sector

Abstract

This study investigates the structure of audit fees paid by the 100 North Carolina county governments during the period 1980-84. The data analysis is designed to document the characteristics of this specific audit environment and to facilitate two kinds of comparisons with prior results for other markets for audit services. First, we relate differences in audit fees to differences in the financial and political characteristics of the county governments. Second, we investigate the structure of audit fees in the years surrounding a change in auditor. The relations between fees and the financial and political factors are addressed by a cross-sectional analysis of the counties' mean audit fees. The results indicate statistically significant associations between audit fees and political factors, consistent with results reported elsewhere for state governments (Baber [1983]), and between audit fees and outstanding debt, consistent with results reported for municipal governments (Rubin [1987]). A cross-sectional, time-series analysis of audit fee changes indicates that audit fees for initial engagements that follow an auditor switch are significantly less than fees for engagements that do not follow an auditor switch. These results contradict prior results for