Resource Allocation And Efficiency In Public Sector Audits

225 Pages·2017·4.85 MB·English

EEddiitthh CCoowwaann UUnniivveerrssiittyy
RReesseeaarrcchh OOnnlliinnee
Theses: Doctorates and Masters Theses
2000
RReessoouurrccee aallllooccaattiioonn aanndd eeffifficciieennccyy iinn ppuubblliicc sseeccttoorr aauuddiittss
Kar M. Chong
Edith Cowan University
Follow this and additional works at: https://ro.ecu.edu.au/theses
Part of the Finance and Financial Management Commons
RReeccoommmmeennddeedd CCiittaattiioonn
Chong, K. M. (2000). Resource allocation and efficiency in public sector audits. https://ro.ecu.edu.au/
theses/1541
This Thesis is posted at Research Online.
https://ro.ecu.edu.au/theses/1541
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RESOURCE ALLOCATION AND EFFICIENCY
IN PUBLIC SECTOR AUDITS
EDITH COWAN UNIVERSITY
LIBRARY
by
KAR MING CHONG
AT heSsuibsm iitnPta erdFt uilafill olftm heen t
RequirfeomtrehA newt asor fd
Doctor of Philosophy (Business) Degree
atth Fea cuolfBt uys iannePdsu sb Mlainca gement,
EdiCtohw aUnn iversity
DatoefS ubmi:s1 s3iOtochnt o2b0e0r0
USE OF THESIS

The Use of Thesis statement is not included in this version of the thesis.
ABSTRACT
In recent years, the push for reform in the Australian public sector audit has placed
the Office of the Auditor-General (hereafter OAG) in a more contestable or market­
like environment, where the OAG is accountable for an efficient and effective
provision of public sector audit. The purpose of this study is to compare the cost
efficiency of in-house and contract-out arrangements to deliver financial audits in the
public sector. It empirically tests whether there are audit cost and audit fee
differences between in-house providers (i.e., the OAG) and contractors (i.e., public
accounting firms). The secondary aims of this study are to develop audit cost and fee
models for the public sector. The unit of analysis is audit cost/fee at the audit
engagement level. The data for this study is collected for a sample of financial
statement audit engagements for year-end 1998, at the state level in Western
Australia. The data is extracted from publicly available and private sources.
The audit cost and fee models are used to test for the cost differences between in­
house providers and contractors. Prior audit production and audit fee studies in the
private and public sectors provide the basis for the development of the two models.
The results indicate that agency size, complexity and risk are positively associated
with audit costs and audit fees. In addition, the total advice provided to the agencies
by the OAG and agency type are also significantly associated with audit costs and
audit fees. Overall, by incorporating these factors into the models, the audit cost
model explains 82 percent of the variance in audit costs, while the audit fee model
explains 86 percent of the variance in audit fees.
More importantly, the main findings suggest that contract-out audits are more costly
than in-house audits. However, this finding is conditional on agency type. Further
analysis reveals that the type of audit arrangement is significantly associated with
audit costs for the statutory authority audits only. There is no significant difference in
audit costs between contract-out and in-house arrangement for hospital audits. This
analysis shows that the statutory authority audits are driving the significance of the
interaction between type of audit arrangement and agency type. Specifically, the costs
of contract-out audits are, on average, significantly higher than in-house audits. This
result is attributed to the contractor's lack of expertise in auditing statutory authority
as there is no equivalent of this agency type in the private sector. As such, the OAG
has the greater advantage of delivering a lower audit cost for statutory authority
audits compared to the contractors. However, the non-significant interaction term in
the audit fee model suggests that cost differences between in-house and contract-out
audits for the statutory authority audits are not reflected in audit fees billed to
agencies. Further analyses, using audit hours as the dependent variable, generally
corroborate the findings from the audit cost and audit fee models.
Sensitivity analyses on the OAG's supervision costs reveal that these costs have a
significant effect on the interpretation of the cost efficiency results. By excluding
supervision costs from contract-out audits, there are significant changes in the results
for the total sample and the two sub-samples (partitioned by agency type). Generally,
these changes favour the contract-out audits for all groupings, where contract-out
audits are now more cost efficient than in-house audits for hospitals, and not
significantly different in costs for statutory authority audits. Additional tests to
investigate the determinants of the OAG's supervision costs in contract-out audits
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reveal that agency size, risk, reliance on internal control, total advice provided by the
OAG and packaged audits (a single contract for two or more audits) are significantly
associated with the supervision costs of contract-out audits.
The main contribution of this study is to add to the growing literature on audit
market efficiency (see Dopuch, Gupta, Simunic & Stein, 2000; Knechel & Payne,
forthcoming). It provides evidence on the production function of different type of
suppliers in the public sector and their relative efficiency in providing audit
services. This study contributes to the recent discussions on the changing nature of
public sector audit market towards a market-based provision of public sector
audits. The evidence from this study allows researchers and policy-makers to
compare the two types of audit arrangement to undertake public sector audits. In
part, this study also contributes to the line of inqui that examines the difference
ry
between government auditors and public accounting firms in US municipalities
(Copley, 1989; Dwyer & Wilson, 1989; Rubin, 1992).
The secondary contribution of this study is to develop and test the audit cost and
fee models in the public sector and provide validity on the transferability of audit
models from the private and public sectors. This study adds to the literature that
examines the public sector audit market. More importantly, it is one of the few
non-US studies that examine the public sector audit market and the findings from
this study suggest that the public sector audit studies from the US are generalisable
to Australia. These findings add to our understanding of the range of market
conditions under which it is so far known to hold.
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DECLARATION
"I certify that this thesis does not incorporate, without acknowledgment, any material
previously submitted for a degree or diploma in any institution of higher education
and that, to the best of my knowledge and belief, it does not contain any material
previously published or written by another person except where due reference is
made in the text".
Signature
Date: 20th February 2001
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ACKNOWLEDGMENTS
This thesis has benefited from the contributions of many supportive people. In
particular, I would like to thank:
• My PhD supervisors, Colin Dolley, Keith Houghton and Gary Monroe,
for their expertise, enthusiasm, confidence and patience throughout the
duration of this study;
• Visiting Scholars at Edith Cowan University, Rashad Abdel-Khalik, Dan
Simunic and Ted Mock for their valuable comments on this study;
• The Edith Cowan University's School of Accounting for its continual
support and participants of the Accounting Research Group Seminar
Series for their constructive comments and suggestions;
• The Faculty of Business and Public Management for providing a Special
Research Grant and a full scholarship for this study;
• The Western Australia's Office of the Auditor General for agreeing to
participate and, provide data and feedback on the project.
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Table of Contents
Abstract 1
Declaration
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Acknowledgments
V
List of Tables X
List of Figures Xlll
CHAPTER 1: INTRODUCTION
Motivation for the Study 1
Financial Audits in the Public Sector 5
Contracting procedures and policies for financial 8
audits
Objective of the Study 18
Notions of Audit Efficiency and Audit Effectiveness 24
Notion of audit efficiency 25
Notion of audit effectiveness 26
Conclusions 27
Chapter Outline and Organisation 27
CHAPTER 2: LITERATURE REVIEW
Introduction 29
Audit Fee Studies 32
Private sector audit fee studies 33
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