Large Audit Firm Premium and Audit Specialization in the Public Sector

38 Pages Posted: 29 Jul 2014

Date Written: July 27, 2014

Abstract

The outsourcing of public sector audits to private sector auditors is an important public sector issue. This paper addresses the existence of an audit brand name premium in the public sector by comparing audit fees between the government auditor and Big 5 auditors. I also examine whether audit premiums exist for Big 5 industry, national and city specialists. The study contributes to prior research by (1) statistically adjusting for self-selection bias, and (2) allowing slope coefficients in the audit fee model to vary between the Big 5 and the government audit sector and estimating the counterfactual fee (i.e., the expected fee using the alternative auditor fee model). The Big 5 premium is around 23 percent. However, this depends on whether the Big 5 auditor is an industry specialist. An industry specialist passes on a discount of 17.4 percent to the client. There is no premium related to being a national leader. The evidence is mixed as to whether city specialists command an audit fee premium.

Keywords: audit fees, public sector, audit premium, self-selection, industry specialism

JEL Classification: M40, M41

Suggested Citation

Bradbury, Michael E., Large Audit Firm Premium and Audit Specialization in the Public Sector (July 27, 2014). Available at SSRN: https://ssrn.com/abstract=2472719 or http://dx.doi.org/10.2139/ssrn.2472719

Michael E. Bradbury (Contact Author)

Massey University ( email )

School of Accountancy
Private Bag 102 904
Auckland
New Zealand
64 9 414 0800 (Phone)
64 9 441 8133 (Fax)

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