The Costs and Benefits of Public Oversight Design: Evidence from the EU

Abstract

We examine the audit pricing and audit quality consequences of three public oversight design features: a) membership; b) powers; and c) the content of inspection reports. We hand-collect a new dataset covering 24 EU countries and we document significant variation in the design of public oversight systems across the EU. Further, using a large sample of listed firms during 2005-2013 we report a significant increase in audit fees when auditor oversight is performed only by non-practitioners, who are potentially more independent and objective, or by regulators with higher enforcement power, who are potentially more efficient. However, based on methodologies used in extant archival studies we do not provide any evidence suggesting that audit quality varies across alternative public oversight systems. Overall, our study provides evidence regarding the effect of different public oversight designs on audit fees and audit quality, including the long-standing debate about the merits of monitoring by experienced practitioners vs. monitoring by independent non-practitioners.