The Determinants of Audit Fees - Evidence from the Voluntary Sector

University of Stirling, Department of Accounting, Finance & Law, Discussion Paper No. 00/04

47 Pages Posted: 10 Jan 2001

See all articles by Vivien A. Beattie

Vivien A. Beattie

Lancaster University - Management School

Alan Goodacre

University of Stirling - Department of Accounting and Finance

Ken C. Pratt

University of Stirling

Joanna E. Stevenson

University of Stirling

Date Written: November 2000

Abstract

Given the growing demand for accountability in the public sector, there is a need to begin to investigate audit pricing issues in markets within this sector. This study makes three principal contributions. First, it develops and estimates, for the first time, a model of audit fee determinants relevant to the charity sector. The model is based on 210 of the top 500 UK charities with average incoming resources of 27 million pounds. As in previous private sector company studies, size, organisational complexity and audit firm location are the major determinants. A positive association between audit fees and fees for non-audit services is also observed. Charity sector factors of empirical significance include the fundamental nature of the charity (i.e., predominantly grant-making or fund-raising), the importance of trading as a source of charity income and the charity's activity. Separate models are developed for grant-making and fund-raising charities, the results reflecting the relative complexity of the audit of fund-raising charities.

Second, the lower auditor concentration in the charity sector market, compared to the private sector market, permits a more powerful test of whether large firms and/or auditor expertise are rewarded with a fee premium. The results show that Big 6 audit firms receive higher audit fees (18.5%, on average) than non-Big 6 firms for audits of fund-raising charities. There is also evidence that non-Big 6 audit firms with expertise in the sector are rewarded with a fee premium over other non-Big 6 firms, again in the more complex audit environment of fund-raising charities.

Finally, the study demonstrates that the charity audit fee rate is significantly lower than that of private sector companies; in fact it is approximately half. Further research that discriminates between alternative explanations of this differential is called for. A change in the reporting of charity audit fees is proposed to reflect any element of 'charitable giving' by the audit firm.

Keywords: Audit fees; Auditor expertise; Charity sector; Non-profit organisation; Fee premium; Non-audit services

JEL Classification: M49, L31

Suggested Citation

Beattie, Vivien and Goodacre, Alan and Pratt, Ken C. and Stevenson, Joanna E., The Determinants of Audit Fees - Evidence from the Voluntary Sector (November 2000). University of Stirling, Department of Accounting, Finance & Law, Discussion Paper No. 00/04. Available at SSRN: https://ssrn.com/abstract=252491 or http://dx.doi.org/10.2139/ssrn.252491

Vivien Beattie

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Alan Goodacre (Contact Author)

University of Stirling - Department of Accounting and Finance ( email )

Stirling, FK9 4LA
United Kingdom
+44 1786 467291 (Phone)
+44 1786 467308 (Fax)

Ken C. Pratt

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

Joanna E. Stevenson

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

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