The Value Added by Auditing and the Hidden Costs of Regulation: Public School Operation

57 Pages Posted: 1 Aug 2006

See all articles by Yoshie Saito

Yoshie Saito

Old Dominion University - College of Business & Public Administration

Christopher S. McIntosh

University of Idaho

Date Written: July 31, 2006

Abstract

We utilize a unique opportunity presented by an education reform instituted in the state of Georgia and examine how more stringent and complicated compliance rules affect auditing and monitoring effectiveness. We examine whether auditing produces economic benefits for stakeholders. The stakeholders in this study are taxpayers and interest groups. We assume that the ultimate goal of auditing is to provide monitoring. We then utilize a relative performance evaluation technique to estimate the average contribution of auditing. We directly estimate the impact of auditing on the reduction of nonproductive use of taxes, which may be a perquisite to local public officials. This approach to estimating the economic value of auditing is consistent with the notion that effective monitoring should enhance optimal resource allocation in society (Lev, 1988; and Penno, 1980). We show that auditing truly provides economic benefits to taxpayers by reducing nonproductive use of taxes. We also analyze external and internal monitoring systems in a politically competitive environment, and to assess the impact of new and complicated compliance standards for auditors on their resource allocation and monitoring effectiveness. We find that stringent compliance rules reduce auditing effectiveness by creating time allocation problems. We show complex compliance rules increase nonproductive use of taxes. Utilizing a unique data set on auditing time, our analysis shows auditing to be an integral part of monitoring strategy, the potential social costs of new policies imposed on auditors should be carefully considered to evaluate the effectiveness of monitoring strategy. We demonstrate that changes in policy really can decrease the efficiency of auditing, which has real economic consequences.

Keywords: Auditing effectiveness, public school auditing, agency theory, the costs of regulation

JEL Classification: M49, H72

Suggested Citation

Saito, Yoshie and McIntosh, Christopher S., The Value Added by Auditing and the Hidden Costs of Regulation: Public School Operation (July 31, 2006). AAA 2007 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=921486 or http://dx.doi.org/10.2139/ssrn.921486

Yoshie Saito (Contact Author)

Old Dominion University - College of Business & Public Administration ( email )

Norfolk, VA 23529-0222
United States

Christopher S. McIntosh

University of Idaho ( email )

Department of Agricultural Economics and Rural Soc
Moscow, ID 83844-3172
United States

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