Gary Giroux

The effect of auditor changes on audit fees, audit hours, and audit quality

Abstract Our study investigates the relationship of independent auditor fees, hours and quality, with particular emphasis on initial audits. Using audits of Texas independent school districts, empirical results indicated specific low balling relationships. First year independent audits had statistically lower audit fees. Despite the lower fees, quality was higher and more audit hours were utilized.

Governance structures and accounting at large municipalities

Either Mayor–Council or Council–Manager forms of governance operate most cities in the US, with a slow trend toward Council–Manager cities. Theoretical modeling suggests that the Council–Manager form should be more efficient, since the city manager has greater incentives to increase financial and accounting performance relative to the mayor as chief executive officer. However, two sets of factors may be more important for municipal comparisons. Since the mid-1980s, regulations of state and local governments have intensified. At the same time, economic conditions improved dramatically. Consequently, these two factors might be more relevant to evaluate the financial and accounting conditions in large cities. The purpose of this paper is to test the significance of governance structure on accounting disclosure levels and financial condition, based on samples of large cities from the early 1980s and the mid-1990s. The findings support the perspective that city manager cities substantially outperform Mayor–Council cities on major dimensions examined in both univariate and multivariate tests. Large municipalities improved on key financial and accounting variables from 1983 to 1996. Council–Manager cities maintained superiority over Mayor–Council cities for accounting disclosure in both periods. Council–Manager cities were significantly better in financial condition in 1983, but the evidence for 1996 was mixed. 2003 Elsevier Science Inc. All rights reserved.

Political interests and governmental accounting disclosure

Abstract In this paper, disclosure indexes of municipalities are developed based on the anticipated needs of political groups. Next, disclosure quality relationships are modeled on political and economic incentives of the groups actively involved in governmental processes of municipalities. The results suggest that each group with political power has only limited influence on disclosure quality.

An empirical analysis of auditor report timing by large municipalities

Abstract Our paper provides further evidence on the timeliness of external audit-reporting for municipalities. Ordinary least squares regression and multiple comparison tests were used to analyze a sample of cities described in the paper. Results were similar to Dwyer and Wilson (1989). However, overall time to issue external audit reports was about a month longer than found in Dwyer and Wilson (1989, p. 41). Explanations are provided as suggestions for factors that affect external audit-timing. Also, we comment on report timing by type of an external auditor.

Accounting controls and bureaucratic strategies in municipal government

Abstract We investigate the degree to which accounting and auditing characteristics in municipal governments lead to effective control systems, i.e., systems which result in the production of services desired by the electorate at minimum costs. Such control systems are subject to strategic manipulation by the bureaucracy. The study examines the effects of accounting disclosure and auditing controls on the level of governmental expenditures. We adopt the Gonzalez-Mehay model (GM 1985) from the public choice literature, which relates governmental expenditures to a number of structural and control variables. The GM model assumes that bureaucrats have a monopoly over information, disseminating little financial information outside the bureaucracy (GM 1985, p. 90). In reality, bureaucrats are subject to auditing, budgeting, and public reporting controls. We found that budget control (as measured by surplus/deficit variables) generally supported a strategic manipulation interpretation, as did total debt (for capital outlays). However, a public accountants audit opinion appears to be an effective control device when an unqualified opinion is obtained. The city manager form of government, especially when combined with a Certificate of Achievement, also supports a control interpretation. The results suggest that, as with commercial organizations, appropriate monitoring methods can lead to superior governmental performance, but that such monitoring methods are subject to capture by agents.

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

Abstract 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.

An Analysis of Municipal Budget Variances

The objective of this research was to determine the extent to which municipal budget variances are systematically biased, the direction of any biases, and the relationship between the biases and various political, economic, demographic and organisational factors. We compared budgeted and actual revenues and expenditures for 125 of the largest US cities and developed regression models to explain the magnitude of differences. Our results indicate that budget variances are decidedly conservative and are most significantly influenced by the extent of political competition and the percentage of funding from inter‐governmental grants. Inasmuch as unreliable budget estimates can thwart the political process, our findings suggest that there may be a need for both citizens and legislative bodies to review more thoroughly the budgets presented to them by city officials.

Organization size, budget cycle, and budget related influence in city governments: An empirical study☆

Abstract This paper explores the relationship between budgeting and perceived power in city government organizations. Data are reported from a survey of perceived budget influence in six city governments in Texas. The findings suggest that perceived influence varies by stage of budget cycle, city size, level of hierarchy, department function, and vertical vs horizontal direction of influence. For example, during budget formulation city managers were perceived as having the most vertical power. During budget implemetation, there was a perceived increase in department head vertical power and a decrease in city council power. Perceptions of horizontal power suggested that budget departments generally had greater perceived influence than operating departments for budget formulation, but not for budget implementation. The findings are used to develop a strategic contingencies model of budget-related power, and to suggest some research steps for testing the proposed model.

Accounting information and municipal bond net interest cost: An empirical evaluation

Abstract The objective of this study was to test the association between the surplus/deficit of selected Minnesota municipalities and the net interest cost of the general obligation bonds issued by these municipalities. This objective was accomplished by employing a pooled time-series design. A two-way analysis of variance was used to determine if there was a significant difference in the effect of net interest cost between positive and negative forecast errors. The ANOVA results of both tests indicate that the surplus/deficit is not correlated with increases/ decreases in the net interest cost of the bonds issued by a municipality. The results were unaffected by the exclusion of bond ratings as an independent variable.

Investor Interests and Government Accounting Disclosure

Analyses disclosure levels from annual reports and budgets from US municipalities, based on the expected incentives of municipal bond investors. Disclosure levels for both budgets and annual reports are variable, suggesting that the quality of disclosures may be based on key actor incentives. Results suggest that annual report disclosures (especially those found in the statistical section) are responsive to investor incentives, while little relation is found between investor needs and budget disclosure. This suggests that annual report information which is historically based is responsive primarily to investor needs.