Private Audit Research Articles

Independence and Objectivity of the Chinese National Audit Office

Independence and objectivity are essential credibility elements for the audit reports. A lack of literature on the independence of the Chinese National Audit Office (CNAO) prompted this paper to fill the void. Based on the audit reports submitted to the Chinese Congress, the CNAO has exhibited its rigorousness in the audit approaches, and its independence and objectivity. Despite the varying length of the reports, these reports comply with the auditing standards on audit reports stipulated by the CNAO. The findings benefit both the government and private audits, within and outside China. Future research could include longitudinal studies on the reports, and the economic and financial implications of these reports to the Congress and auditees. Cross border comparisons, in particular among the emerging economies, will add benefits to the policy makers and audit profession.

Investigating the audit fee structure of local authorities in England and Wales

The purpose of this paper is to model and test the audit fee structure of local authorities in England and Wales, with particular interest in fees charged by the Big 4 and other private sector auditors. The Audit Commission, a national public body under Parliament, regulates local government audits in England and Wales. The Audit Commission sets audit standards, appoints the auditors, and establishes a formula to determine standard audit fees. Constrained by the standard audit fees, each local authority and its auditor negotiate the actual audit fees. The majority of audits are conducted by district auditors (public sector employees under the Audit Commission), although about 25% of local authorities are audited by one of six private auditors (including three of the Big 4). Regression results for financial year 2000/01 have high explanatory power and work well to explain fee differences. Model relationships are somewhat different from US counterparts (which is the context of most of the audit economics literature) and type of authority partially explains fee differences. OLS regression results indicate a Big 4 discount for local authority audits. Because of expected self-selection bias, the Heckman procedure is used to analyse the differences between private sector and public sector auditors, which indicates no selection bias for Big 4 firms, although bias is present for private firms as a whole and district auditors in some models. When fees are size-adjusted, results continue to show a Big 4 discount. The Big 4 discount was robust to other follow-up tests.

Client Retention and Engagement-Level Pricing

This study contributes to the debate on the motives for auditor changes by examining the relationship between client retention and one of the many factors that potentially influence client retention, engagement-level pricing. We find for a sample of public and private audit engagements that the difference between realized realization rates (the ratio of the audit fee billed to the standard audit fee) and expected realization rates is positively associated with client retention over a five-year window. Our findings suggest pricing pressure is more than an isolated occurrence and the incumbent auditor's inability to recover unexpectedly high labor usage is associated with the severing of the auditor-auditee relationship.

External audit in the National Health Service in England and Wales: A study of an oversight body’s control of auditor remuneration

In the National Health Service (NHS) in England and Wales an oversight body, the Audit Commission (AC), defines the scope of the external auditors’ work, appoints the auditors and has oversight of their fees and audit quality. This heavily regulated audit regime mitigates some of the deficiencies observed in high profile corporate failures. Independence, it has been argued, is influenced by the total auditor remuneration paid by the client. In this study we examine total auditor remuneration in a regulated market which seeks to ensure audit independence and audit quality. In particular we undertake rigorous analysis of auditor remuneration by the type of auditor: We place emphasis on the differentiation between private sector firms and the AC’s in-house auditors (District Audit). Individual private audit firms charge premiums (up to 16%) for particular audit work in identified locations, but no premiums were found when we examined total auditor remuneration. The regime appears to permit efficient operation of the audit market while safeguarding both audit independence and standards.

Emasculating Public Accountability in the Name of Competition: Transformation of State Audit in Victoria

This paper outlines contextural processes that resulted in the comprehensive transformation, in 1998, of a state audit institution in Australia. The reforms to the Victorian Auditor-General’s Office were ostensibly an outcome of the implementation of institutional economic theories, and more particularly a commitment to adopt competition policy in the public sector. They resulted in the adoption of a segmented model of state audit in which all state audits were made fully contestable. The right to conduct audits was stripped from the auditor-general and transferred to a statutory body, the principal function of which was to compete with private audit firms for the conduct of all financial statement and performance audits of all government bodies. The paper explores two major issues raised by these reforms. First, it considers whether the public accountability obligations of auditors-general can be maintained under a regime in which auditors-general conduct no audits. Second, it examines whether the reforms can be justified on the basis of the inefficient performance of the auditor-general, or of the implications of economic theory. The paper rejects the contention that principles enshrined in competition policy are an appropriate basis on which to reform state audit. This conclusion is reinforced through analysis of accountability and public interest considerations, the implications of the economic theories underpinning the thrust of the government’s reforms, and evidence rejecting the contention that the auditor-general acted as a monopoly supplier. The paper concludes, as widely contended at the time, that the audit reforms undertaken in Victoria in 1998 were politically and not economically motivated.

The determinants of audit fees—evidence from the voluntary sector

Given the growing demand for accountability in the public sector, there is a need to begin to investigate audit pricing issues in this sector. This study makes three contributions. First, it develops and estimates, for the first time, a model of audit fee determinants for the charity sector. As in previous private sector company studies, size, organisational complexity and audit firm location are the major determinants. A positive association between audit fees and fees for non-audit services is also observed. Charity sector factors of empirical significance include the nature of the charity (i.e., grant-making or fund-raising), its area of activity and the importance of trading income. Separate models for grant-making and fund-raising charities reflect the relative complexity of the audit of fund-raising charities. Second, the lower auditor concentration in the charity sector market, compared to the private sector market, permits a more powerful test of whether large firms and/or auditor expertise are rewarded with a fee premium. In the more complex audit environment of fund-raising charities, the results show that Big Six audit firms receive higher audit fees (18.5%, on average) than non-Big Six firms. Also, non-Big Six audit firms with charity expertise are rewarded with a fee premium over other non-Big Six firms. Finally, the study demonstrates that the charity audit fee rate is significantly lower than that of private sector companies; in fact it is approximately half. A change in the reporting of charity audit fees is proposed to reflect any element of ‘charitable giving’ by the audit firm.

Developments: External Audit Fee Levels in NHS Trusts

This article discusses the external auditing regime of NHS trusts and analyses the fees charged by their auditors. It adapts approaches developed in the private sector to investigate audit fees paid by NHS trusts and finds that, while similar factors are associated with the audit fees of trusts, there is no evidence of a ‘Big 6’ premium and trust audit fees are significantly lower than those of similar private sector organizations. Explanations for this are sought in the different natures of public and private sector audits, which indicate that differences in fees might be anticipated in the public sector, especially with the presence of a quasi-regulator in the form of the Audit Commission.

Public Audit: A Comment and a Clarification of CIPFA's Views

This article aims to clarify CIPFA’s views on the arrangements for ‘public audit’, as reflected in its submissions to the Nolan Committee and the subsequent Cabinet Office/Treasury Review of external audit in the public services. In particular, it attempts to correct perceived misapprehensions about CIPFA's attitude to the role of the private audit firms in public sector audit.

Clinical Practice and Economics

This most interesting and stimulating book is edited by C. I. Phillips, who is professor of ophthalmology at the University of Edinburgh, and by J. N. Wolfe, professor of economics at the same institute. Most of the contributors are from the United Kingdom, and therefore, most of the problems relate to medicine as it is practiced in Great Britain under the control of the National Health Service (NHS). Some of the chapters deal with problems applicable to medicine all over the world, such as decision making in diagnosis, voluntary private audits, and automation in medicine. Of special interest is the first chapter on randomized clinical trial, written by Fred Ederer from the National Eye Institute. A good number of the contributions are of little concern to the American physician—at least for the present. Questions concerning how the cost of drugs that are prescribed under the NHS can be kept down,