Municipal selection of a state or external auditor for financial statement audits

Abstract

The municipal audit market, unlike the private sector, requires an understanding of the type of audit organization, state or private sector, used to audit financial statements. My research assesses the differences in audit fees charged and audit timeliness between state and private-sector auditors. In addition, the underlying reasons for the selection of an audit organization are addressed. A sample of Ohio cities is used in regression models to provide empirical evidence regarding the differences among audit organizations. Results suggest that, in Ohio, private-sector auditors systematically charge higher fees and are associated with more timely audits. Cities requesting and using external auditors (thereby receiving a faster but more expensive audit) are more likely to be associated with modified audit opinions and new debt issues. Requested private-sector auditors are less likely to be associated with manager-headed municipalities.