The Effect of Contracting-out Audits on Resource Allocation and Efficiency in Public Sector Audits

Abstract

ABSTRACT: Significant changes in public sector have impacted on the operations ofgovernment audit offices in several countries, notably, Australia, New Zealand, Canada,United Kingdom and the United States. Government audit offices are required tooperate in a more contestable or market-like environment, where they are accountablefor an efficient and effective provision of public sector audit. The purpose of this studyis to compare the efficiency of in-house and contract-out arrangements to deliverfinancial audits in the public sector. This study examines the audit cost efficiency withinthe context of the current public sector arrangement at the state level in WesternAustralia (WA). The results for 178 public agencies in WA suggest that contract-outaudits are more costly than in-house audits but the result is conditional on agency type.Specifically, for statutory authority audits, the costs of contract-out audits are, onaverage, significantly higher than in-house audits. For hospital audits, there is nosignificant difference in audit costs between contract-out and in-house arrangements.Sensitivity analyses reveal that the supervision costs incurred by the Auditor-General tomonitor audit quality have a significant impact on the interpretation of the costefficiency results.