Governance Structures and Contracting Out Municipal Auditing in Finland and Norway

Abstract

This study explores the effects of governance structure and contracting out on municipal audit costs. There is economy of scale, asymmetric information and human asset specificity in municipal auditing. As a consequence, both unified governance and market contracting could result in high total audit costs for municipalities. According to Oliver Williamson, relational contracting has been a neglected issue in transaction costs analysis (TCA). We studied 47 municipalities in Finland and 298 municipalities in Norway using multivariate analysis. The municipal audit fees per capita were highest in Norway where the municipal audit market was regulated and had virtually no market contracting. The audit fees per capita increased most in Finland, possibly due to lowballing after the Finnish market was deregulated in 1997. The municipalities in both Finland and Norway predominantly used audit in relational contracting even though the audit fees per capita were relatively high. Relational contracting could be efficient when production, transaction and political costs are taken into account. The findings corroborated several core TCA propositions.