Elizabeth K. Keating
Harvard University
Janet Greenlee
University of Dayton
Teresa Gordon
University of Idaho
Mary Fischer
The University of Texas at Tyler
Abstract: Our paper examines one of the most rigorous forms of auditing in the United States: audits undertaken to comply with the Single Audit Act (SAA). We examine the relation between auditor choice and adverse audit findings using a sample of 12,656 audit reports from 1997 to 1999, representing 11,892 unique nonprofit entities and 3,592 audit firms. We find that nonprofits select more experienced auditors when the nonprofits are larger in size, receive larger federal grants and operate in certain sectors (Education, Public/Societal). We initially find that the lower risk auditees (i.e. higher quality auditees) also select more experienced auditors. However, after controlling for an audit firms propensity to issue adverse findings, we find that low-risk auditees select auditors using the same criteria as their higher risk counterparts. In addition, we find evidence that nonprofits avoid audit firms that issue more adverse audit findings. Univariate and preliminary multivariate analysis indicate a significant negative relation between being a low-risk auditee and adverse audit findings. However, after accounting for the audit firms propensity to issue audit findings, the multivariate analysis suggests an auditor effect, in which auditees of more experienced firms receive fewer adverse audit findings. Further research can help determine whether this effect is associated with more experienced firms only accepting higher quality clients or conducting a different level of audit service.
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