Abstract
In the context of austerity‐inspired reforms to public audit in England we investigate the extent to which audit firms mitigate management bias in public sector financial reports. A substantial body of literature finds that both public and not‐for‐profit managers manage ‘earnings’ to report small surpluses close to zero by managing deficits upwards and surpluses downwards. Under agency theory, auditors acting in the interests of their principal(s) would tend to reverse this bias. We exploit privileged access to pre‐audit financial statements in the setting of the English National Health Service (NHS) to investigate the impact of audit adjustments on the pre‐audit financial statements of English NHS Foundation Trusts over the period 2010–2011 to 2014–2015. We find evidence that auditors act to reverse management bias in the case of Trusts with a pre‐audit deficit, but find no evidence that this is the case for Trusts with a pre‐audit surplus. In the case of Trusts in surplus, these findings are consistent with auditors’ interests being aligned with management, rather than principals.
Highlights
In the context of austerity-inspired reforms to public audit in England we investigate the extent to which audit firms mitigate management bias in public sector financial reports
Foundation Trusts receive most of their income from public sources and intra-National Health Service (NHS) balances are reconciled, so this leaves little potential for the exercise of discretion, there is still some scope for misstatements which are not material13 and which are not adjusted in the audit process
Perhaps even enhance, management bias in the majority of Trusts that operate with a small surplus suggests an overall bias downwards in reporting across the whole sample
Summary
In the context of austerity-inspired reforms to public audit in England we investigate the extent to which audit firms mitigate management bias in public sector financial reports. The climate of austerity and uncertainties about future funding enhance the incentives for such ‘earnings’ management at a time when the public, and their representatives in Parliament, are increasingly dependent, especially for the purposes of resource allocation, on a high quality public audit service to mitigate management bias in financial reporting Prior empirical studies on public sector audit quality are, limited and are concentrated in North America, US municipalities (Copley, 1991; Deis and Giroux, 1992; McLelland and Giroux, 2000; Cohen and Leventis, 2013) The focus of these papers has largely been on the determinants of audit quality rather than on the question as to whether auditors mitigate management bias in reporting. This direct measure of audit outcomes has been facilitated by access to pre-audit financial statements for the period 2010–2011 to 2014–2015
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
