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Title
Abstract
FAQs
Introduction
Summary of the Theory and Hypotheses
Method
Analysis
Discussion
Conclusion
References

Explaining Municipal Audit Costs: Considering the Principal

Profile image of Sven-Olof CollinSven-Olof Collin

2009

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38 pages

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Abstract

Studies of audit fees have focused on the audit market and on the organisational costs related to the production of audit. Audit is, however, an activity that is oriented towards the principal of the organisation, and could therefore be expected to vary according to the relationship between the agent and the principal, and vary according to the organisation of the principal. This is the governance issue of auditing. We hypothesize that audit fees are used mainly as a signalling device by agents and as a means of reducing conflict among agents when communicating to principals, be they citizen, the mass media or interest group. The model is tested on data from Swedish municipalities, thus extending the study of audit fees to political organisations. The test results supported the ordinary propositions of organisation and markets, as well as the proposition of the principal, thus suggesting that audit could be managed without managing auditors.

FAQs

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How do agency costs influence municipal audit fees in Sweden?add

The paper reveals that agency costs significantly affect municipal audit fees, with larger municipalities experiencing increased costs due to agency conflicts. For instance, politicians may use audit fees as signals of accountability toward citizens, thereby increasing overall audit expenses.

What role does political competition play in determining audit costs?add

Evidence indicates that higher political competition correlates positively with increased audit fees, suggesting that politicians enhance audit efforts to convey credibility to citizens. The concentration of political power, evaluated by the Herfindahl index, shows an unexpected relationship with fees, challenging conventional theories.

How do the characteristics of Swedish municipalities affect audit fees?add

Swedish municipalities' varying sizes and tax bases demonstrate complex relationships with audit fees, with larger populations potentially facing higher fees due to increased agency costs. Additionally, municipalities with higher tax bases signal demand for external monitoring, influencing fee structures.

What factors contribute to the disparity in audit fees between municipalities?add

The study identifies size, complexity, and governance structures as key determinants of municipal audit fees, showcasing significant variability across Sweden's 290 municipalities. For example, municipalities with many political committees exhibit higher audit costs due to increased administrative complexity and agency conflicts.

What insights does the research provide regarding the use of Big 4 auditing firms?add

The findings suggest that utilizing Big 4 audit firms does not inherently lead to higher audit fees in Swedish municipalities, contrasting with expectations of branding costs. Instead, the specialized firm Komrev shows a positive correlation with fees, indicating that competence may influence pricing more significantly.

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