Audit Procurement: Managing Audit Quality and Audit Fees in Response to Agency Costs

Abstract

This study examines (1) the association between agency costs and audit-procurement practices, and (2) the association between audit-procurement practices, audit quality, and audit fees. Improved audit procurement has been promoted as a mechanism for improving audit quality, particularly in the public sector where auditor moral hazard problems have historically existed. Using a sample of municipal organizations, we find evidence that cities facing higher levels of agency costs, and cities that rely more on their external auditors to relieve such costs, tend to have better-developed audit-procurement practices. We also find evidence that well-developed audit-procurement practices (and individual audit-procurement elements), are associated with the hiring of auditors who have higher levels of industry experience—suggestive of higher audit quality. Finally, we find evidence suggesting that well-developed audit-procurement practices have a minimal combined effect on audit fees; however, individual audit-procurement elements are associated with audit fees.