The Value of Public Sector Audit: Literature and History

Abstract

This paper explores the value of financial statement auditing in the public sector. The study applies theory about auditing from the private sector as well as the public sector to explore ways in which public auditing sector can be expected to be valuable. It finds that there are a number of complementary explanations for the value of public audit, including agency, signaling, insurance, management control, confirmation and governance explanations. The evidence from research and history is generally consistent with the agency and management control explanations. There is some support for the signaling and insurance explanations, while research evidence suggests that governance has differing impact in the public sector compared to the private. The confirmation hypothesis and governance explanations are also potentially relevant. Auditing in the public sector is an area where more research is valuable. The paper concludes with issues for further investigation.