Signaling Government Financial Reporting Quality to Credit Analysts

Abstract

The quality of governmental financial reporting and auditing is of continuing concern to oversight bodies and to those interested in the financial accountability of governments. While governments may have operational incentives to improve financial reporting, external incentives depend on external users' ability to distinguish cities with better reporting practices from those with inferior systems. Two methods that cities with better systems may use to distinguish themselves are the GFOA's Certificate of Excellence for Financial Reporting and through the reputation of the audit firm. This article examines whether the degree of reliance that bond raters place on accounting data is influenced by the Certificate and by the type of auditor. In addition, since inadequate fees have been cited as a possible cause of substandard audits, we examine the trend in audit fees for cities for the period 1985–1989. The findings suggest that the use of a Big Eight audit firm does increase the reliance placed on cities' financial statement numbers but there is only weak evidence that the Certificate has a similar effect. In addition we find evidence of a significant decline in audit fees for the period 1985–1989.

The value of public sector audit: Literature and history

“…Research on signaling has been applied to public sector accounting and auditing in studies like Evans & Patton (1987) and Sanders & Allen (1993) which examine whether public sector entities that apply for certification of their financial statements do so in accordance with the incentives for signaling. The signaling or information explanation is sometimes considered to be complementary to the agency explanation (although Evans & Patton, 1987, argue that there is more support for signaling than agency).…”

“…The 2001 audit legislation defines which entities are to be audited by the Auditor-General (Evans & Patton 1987;Sanders & Allen 1993). The Auditor-General publishes the auditing standards they will use in a report to Parliament at three-yearly intervals (Green & Singleton, 2009, p. 153).…”

Signaling Public Private Partnership Activities: Reporting Behavior Within Annual Reports

“…Analogously, the extensive accounting literature discusses both compulsory (e.g., Cooke 1989) and voluntary disclosures of private firms (e.g., Wagenhofer 1990) as well as of public financial reporting (e.g., Sanders and Allen 1993). Nonetheless, neither obligatory nor voluntary reporting on Public Private Partnership (PPP) in accounting-related reports have been addressed so far in spite of the growing importance and volume of PPP investment and research.…”

Actorhood of the European Court of Auditors: a visual analysis

“…The evolution of public sector auditing can be traced back to public sector reforms that began in the 1980s (Troupin et al, 2010;Abbott, 1988;Hay and Cordery, 2018;Mattei et al, 2021;Nerantzidis et al, 2020;Hay and Cordery, 2021;Cordery and Hay, 2021a). Research has explored how public sector auditing practices have changed over time (Pearson, 2014), including what audit quality is and evidence for it (Copley, 1991;Sanders and Allen, 1993;Deb, 2018). Scholars have explored the transformation of auditing in its role and scope from compliance and financial audits to performance and non-financial audits (Baber, 1983;Evans and Patton, 1987;Roussy, 2013;Thomasson, 2018;Skene, 1985;Bryan, 2021).…”