Governmental nonaudit services and choice of incumbent/non-incumbent CPA firm

Abstract

Given the focus on auditor independence in the corporate literature, prior research has focused almost exclusively on nonaudit services obtained from the incumbent CPA firm. By contrast, auditor independence is generally not viewed as a critical issue in the public sector; rather, the policy emphasis is on the control benefits obtained from an audit. Despite the fact that there is less concern about auditor independence and the low search costs and potential knowledge spillover benefits associated with procuring nonaudit services from the incumbent auditor, governments appear to spend proportionately more on nonaudit services obtained from non-incumbent CPA firms. Our empirical findings are consistent with management’s reduced sensitivity to perceived auditor independence in the government environment and the potential importance of partisan politics and political patronage.