Auditor expertise: Evidence from the public sector
Abstract: This paper is the first attempt to study the relationship between public auditor expertise and fiscal performance. I find that states requiring the auditor to hold a professional degree feature significantly higher credit ratings and lower expenditures and debt.
Summary (1 min read)
- This paper is the first attempt to study the relationship between public auditor expertise and fiscal performance.
- I find that states requiring the auditor to hold a professional degree feature significantly higher credit ratings and lower expenditures and debt.
1. Auditor expertise
- In the political process the quality, quantity and timing of information is, to a great extent, determined by transparency and supervision requirements (e.g., Alt and Lassen, 2006).
- In the corporate auditing literature, one of the main drivers of audit quality is auditor expertise.
- Due to electoral pressure or career concerns, public decision makers face incentives to misreport.
2. Data on US state auditors
- I take advantage of the decentralizedUS federal structure.
- Every state has its own constitution and legal framework defining the details of its auditing institution.
- The standard approach for studies on the influence of fiscal institutions on government performance adopts fiscal measures such as expenditure or debt as dependent variables.
- Similar approaches have been used by, e.g., Depken and Lafountain (2006) and Schelker (2012) to study the influence of fiscal institutions and corruption, and by, e.g., Mansi et al. (2004) in the context of corporate auditing quality.
- The data on state credit ratings are collected from Moody’s Investor Services, Fitch Ratings and Standard & Poor’s.
3. Empirical strategy
- When estimating the effect of auditor expertise on the normalized credit rating I estimate tobit models that take into account that Rst is censored at −1 and 0.
- The states without GOB rating are Arizona, Colorado, Iowa, Idaho, Nebraska and South Dakota.
- When approaching this potential selection problem, I do not find a significant correlation between auditor characteristics and the excluded states.
- I estimate random effects (RE) as well as fixed effects (FE) models.
- All regressions include a set of standard state-specific covariates.
4. Empirical results
- Table 1 presents the regression results of auditor expertise on GOB ratings.
- The linear fixed effects regressions in columns 5 and 6 show that the coefficients remain statistically significant, while the impact is somewhat higher in magnitude.
- On average, the states demanding the auditor to hold at least a CPA feature approximately a one notch higher credit rating compared to states without such a requirement.
- Index capturing various removal procedures for the auditor.
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Q1. What are the contributions in "Auditor expertise: evidence from the public sector" ?
This paper is the first attempt to study the relationship between public auditor expertise and fiscal performance. Auditors are a fundamental supervising institutions in the public as well as the corporate sector to ensure that reported information is accurate. This study focuses on the influence of professional expertise of the chief auditor. Hence, the hypothesis is thatmore competent auditors improve the quality and reliance of reported information, which results in improved government performance. In research on transparency and auditing, this strategy features several drawbacks: ( 1 ) fiscal variablesmight be biased due tomisreporting and ( 2 ) fiscal levels might not be informative about government efficiency. To obtain the market evaluation of anticipated audit quality I control for the influence of the reported state of public finance and I include real per capita debt and expenditures in the regression framework. 099 * * −0. 099 * * −0. 118 * * * −0. 107 * * −0. 114 * * −0. 139 * * * ( 0. 044 ) ( 0. 044 ) ( 0. 043 ) ( 0. 050 ) ( 0. 044 ) ( 0. 043 ) Auditor controls – Included Included Included Included Included Further controls – – – Included – – Year fixed effects – – Included Included – Included State fixed effects – – – Included Included Observations 384 384 384 384 384 384 R-squared 0. 261 0. 285 0. 202 0. 360 0. 152 0. 227 LM