An Empirical Investigation of the Market for Audit Services in the Public Sector

The structure of audit fees paid by 100 North Carolina county governments over the period 1980-1984 is investigated. The differences in audit fees are related to differences in the financial and political characteristics of the county governments. The structure of the audit fees in the years surrounding a change in auditor are examined. A cross-sectional analysis of the counties' mean audit fees indicates statistically significant associations between audit fees and political factors (party membership and commissioner turnover) and between audit fees and outstanding debt. The financial variables considered jointly are not significant. A cross-sectional, time-series analysis of audit fee changes reveals that audit fees for initial engagements that follow an auditor switch are less than fees for engagements that do not follow an auditor switch. The results show a mean reduction of about 20% for initial engagements versus the normal 7.5% increase in audit fees.