Auditor Size and Internal Control Reporting Differences in Nonprofit Healthcare Organizations

Abstract:     
We investigate whether auditor size is associated with the disclosure of internal control exceptions among Circular A-133 audits of nonprofit healthcare organizations. Our focus on auditor report outcomes within the nonprofit healthcare sector is timely and relevant, given the sector’s growth and escalating concern for accountability and transparency. Using a sample of 1,180 Circular A-133 audit reports from 2004 to 2008, we find evidence that audits performed by Big 4 firms are less likely to disclose reportable conditions and material weaknesses than those performed by smaller CPA firms. Additional analyses indicate this relation only remains statistically significant for a subsample of small nonprofit healthcare organizations, possibly due to greater selectivity or lower efforts by the Big 4 auditors. Our descriptive statistics also suggest that the market share of the Big 4 firms for Circular A-133 audits decreased during the sample period. We discuss the potential implications of these findings from an audit quality, market dominance, and client size perspective. The results are relevant to hospital financial managers wanting to obtain higher quality audits at a lower cost.

Keywords: Auditor size, Circular A-133, Big 4 firms, Nonprofit healthcare, Single Audit Act

JEL Classification: I11, M49

Accepted Paper Series