Governance Structures and Contracting Out Municipal Auditing in Finland and Norway

Abstract

This study explores the effects of governance structure and contracting out on municipal audit costs. There is economy of scale, asymmetric information and human asset specificity in municipal auditing. As a consequence, both unified governance and market contracting could result in high total audit costs for municipalities. According to Oliver Williamson, relational contracting has been a neglected issue in transaction costs analysis (TCA). We studied 47 municipalities in Finland and 298 municipalities in Norway using multivariate analysis. The municipal audit fees per capita were highest in Norway where the municipal audit market was regulated and had virtually no market contracting. The audit fees per capita increased most in Finland, possibly due to lowballing after the Finnish market was deregulated in 1997. The municipalities in both Finland and Norway predominantly used audit in relational contracting even though the audit fees per capita were relatively high. Relational contracting could be efficient when production, transaction and political costs are taken into account. The findings corroborated several core TCA propositions.

An Empirical Investigation of Audit Pricing in the Public Sector: The Case of Greek LGOs

“…Therefore, size should be associated with audit fees. Prior studies have consistently documented positive association between size and audit fees in the public sector (e.g., Rubin, ; Johnsen et al., ; Deis and Giroux, ; and Giroux and Jones, ). Similar to prior studies (Rubin, ; and Deis and Giroux, ), we use the natural logarithm of municipal population as a proxy for size.…”

“…This is very similar to findings from the private sector probably because US public organizations operate in competitive markets for the supply of audit services and compete with private firms in capital raising (US municipalities issue bonds which are rated; see Ward et al., ). Subsequent research in Australia (Boon et al., ), Canada (Bandyopadhyay and Kao, ), the UK (Clatworthy et al., ; Basioudis and Ellwood, ; Basioudis and Ellwood, ; and Giroux and Jones, ) and Finland and Norway (Johnsen et al., ) tend to provide broadly similar directions although specific variables differ both in operationalization and magnitude, probably due to the different institutional characteristics.…”

“…() and Johnsen et al. (). We measure profitability by the return (surplus or deficit) on equity ratio similar to Chan et al.…”

“…While there is a growing literature on the association of audit fees with various factors in the private sector, relevant research in the public sector has, to some extent, stagnated. Additional interest is added considering that the audit fee public sector literature has been mainly tested in the context of the US and relatively recently in other Anglo‐Saxon countries (Giroux and Jones, ) and Nordic Countries (Johnsen et al., ).…”

A Critical Appraisal of the Current Use of Transaction Cost Explanations for Government Make-Or-Buy Choices: Towards a Contingent Theory and Forms of Tests

“…Brown and Potoski 2003;Fieock and Jang 2009;Johnsen et al 2004;Lamothe et al 2008;Levin and Tadelis 2010;Nelson 1997;Rodrigues et al 2012). Unsupportive and mixed results have, however, also been published (e.g.…”