Kevan L. Jensen

The Effect of a Bidding Restriction on the Audit Services Market

Central to debates about the audit services market is the effect of competition on auditor performance. The economic performance of auditors has been examined in studies of pricing, labor allocation, and concentration statistics. The purpose of this study is to document the price and quality effects of an unusual state-mandated market restriction that required nonprice competition and prohibited price competition among auditors. We adopt an industrial organization perspective, with particular emphasis on capture theory. Specifically, we analyze Section 473.317, Florida Statutes (Rule 21A24.03, Florida Administrative Code), which mandated that proposals to perform an audit not include fee information1 and specified the procedure to be used to select an external auditor. Basically, an auditee was required to rank prospective auditors in order of nonprice preference and

An examination of municipal audit delay

Abstract Our study examines the effects of municipal audit and audit-firm characteristics on municipal audit delay. Although the effects of audit characteristics are largely determined by municipal structure and reporting requirements, the effects of audit-firm characteristics are likely to be controllable through the external audit procurement process. If issuing a timely financial report is important to municipalities, municipal officers must understand what factors they should consider regarding the municipalities organizational form, the external auditor procurement process, and what auditor characteristics to consider when selecting an independent external auditor. Our results suggest that several municipal audit and audit-firm characteristics influence municipal audit delay. Specifically, management incentives for timely reporting, including a city manager form of government, the presence of a high quality financial reporting system, and bonded indebtedness all tend to decrease audit delay. State regulations regarding the audit procurement process increase audit delay. Audit delay is significantly increased by municipal characteristics, such as municipal size, audits performed during the external auditors busy season, the receipt of a qualified audit opinion, and for municipalities that were required to comply with the Single Audit Act. Investigation of external auditor characteristics indicates that auditors that perform several municipal audit engagements provide audits on a more timely basis. Additionally, larger audit-firm offices appear to be able to allocate resources in such a manner to expedite the audit. We also investigate municipal audit and audit-firm characteristics for small (population 20,000), separately. Our results indicate that the characteristics that influence audit delay are quite different between the two size classifications. Overall, our results provide useful information to both large and small cities regarding the determinants of municipal audit delay.

A basic study of agency-cost source and municipal use of internal versus external control

Abstract This study examines the association between agency-cost source and the use of internal control versus external control in municipal control systems. Specifically, I focus on the differences between internal and external control to determine whether characteristics of underlying organisations might lead to differential demand for internal and external control. Differential demand is argued to be linked to the managers position as principle or agent (or alternatively the presence of internal or external agency costs, respectively). Internal control is posited to be used specifically to address internal agency costs; external control is posited to be used specifically to address external agency costs. Results are consistent with these hypotheses. Cities facing high levels of agency costs from voters and creditors tend to hire Big 5 auditors or auditors with municipal experience, but generally do not employ internal auditors or certified finance officers. Also, cities facing high levels of agency costs from employees tend to employ internal auditors or certified finance officers, but generally do not hire Big 5 auditors or auditors with municipal experience. There does not appear to be widespread substitution of internal and external control to address agency problems in municipal organisations. For data availability contact the author.