Audit Procurement: Managing Audit Quality and Audit Fees in Response to Agency Costs
55 Pages Posted: 19 Nov 2003
Abstract
This study develops and tests a model of audit procurement as a control mechanism utilized within an agency framework to regulate audit quality and the related audit fees. Procurement mechanisms are comprised of (1) procurement procedures, (2) personal characteristics of individual procurers, and (3) organizational characteristics under which procurement decisions are made. Using a sample of cities, we find evidence consistent with our model. The presence and level of audit procurement is associated with the existence of agency costs. Audit procurement in general, and the individual elements of audit procurement are associated with the hiring of auditors with higher levels of industry expertise - suggestive of higher audit quality. Moreover, audit procurement in general, and some of the individual elements of audit procurement are associated with audit fees. These results are consistent with our hypothesis that managers view audit procurement as a mechanism for regulating audit quality and audit fees, and incorporate it as part of their overall control systems.
JEL Classification: M49
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