Economic Consequences of Hiring an Auditor With Industry Expertise: An Empirical Analysis Among NPOs

Abstract

This study examines economic consequences of auditor choice in the Belgian nonprofit (NP) setting, where the identity of both the audit firm and the audit partner is required to be disclosed. Specifically, we examine the influence of auditor choice in favor of an auditor with industry expertise on future contributions (being the sum of donations and grants) received among a large sample of Belgian nonprofit organizations (NPOs). Consistent with a signaling perspective, our results indicate that NPOs benefit from engaging an audit partner with industry expertise, by positively influencing future contributions received by the NPO. However, we observe no significant effect of audit firm industry expertise on future contributions received. Our results therefore suggest that NPOs’ resource providers presume that industry expertise is situated at the signing partner level rather than at the audit firm level.

Accruals Management to Avoid The Current Ratio Falling Below One: An Empirical Analysis Among Nonprofits

“…This split of the aggregate figure is derived from the notes to the financial statements. Prior research on Belgian data (see Reheul et al, 2018) reports considerable inaccuracies with regard to this split in the notes, and findings from this additional analysis should therefore be interpreted with caution. The interaction between donations and PREBELOW yields a significantly positive coefficient, whereas the coefficient for the interaction between grants and PREBELOW is insignificant.…”

Does Hiring a Local Industry Specialist Auditor Matter to Nonprofit Organizations?

“…This allows for smaller audit firms focusing on nonprofit sector audits to become industry specialists in their geographic area. Similar to Reheul et al (2013) and Reheul et al (2018), we also consider the different industries within the nonprofit sector, as they likely require distinct and specialized knowledge. We use the NTEE classification system used by the Internal Revenue Service (IRS) and the National Center for Charitable Statistics (NCCS) to identify subindustries within the nonprofit sector.…”

“…Additional nonprofit research finds auditors specializing in nonprofit sector audits are associated with higher fees (Beattie, Goodacre, Pratt, & Stevenson, 2001; Fischer, Johnson, & Elder, 2004) and decreased internal control weakness reporting (Petrovits et al, 2011). Research on European nonprofits has found industry specialization associated with an increase in future government grants (Reheul et al, 2018), lower audit fees (Verbruggen et al, 2015), and longer audit report delays (Reheul et al, 2013). According to Reheul et al (2013), the positive association between auditor industry specialization and audit report lag is indicative of specialist auditors expending greater auditor effort to provide higher audit quality.…”

“…If local industry specialists provide similar (or incrementally greater) reliability assurances for users, we would expect direct donations to be higher for those organizations selecting a local industry specialist auditor. Reheul et al (2018) examine the consequences of industry specialist audit firm choice in the Belgian nonprofit setting from a signaling perspective. They argue that nonprofits benefit in the form of higher future government grants from engaging an industry specialist audit firm based on the premise that industry specialist auditors signal credibility to government grantors.…”

“…Krishnan, Li, & Wang, 2013). Third, nonprofit industry specialization has also been found to be important outside of the United States, specifically in Belgium (Reheul, Van Caneghem, Van den Bogaerd, & Verbruggen, 2018;Reheul, Van Caneghem, & Verbruggen, 2013;Verbruggen, Christiaens, Reheul, & Van Caneghem, 2015). We respond to the call in Reheul et al (2018) to advance our understanding of industry specialist auditor choice in other settings.…”