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The Market for External Audit Services in the Public Sector: An Empirical Analysis of NHS Trusts

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  • Mark A. Clatworthy
  • Howard J. Mellett
  • Michael J. Peel

Abstract

This study investigates the market for audit services in the UK National Health Service (NHS). The market has a number of interesting features, including the presence of the Audit Commission as a regulator, appointer and provider of audit services. Following a theoretical overview of audit pricing in the NHS, evidence is provided on the behaviour of private sector auditors in an environment where audit risk characteristics differ from the private sector. The research also investigates, for the first time in the public sector, the relationship between audit fees and non–audit (consultancy) fees. Comparisons are also drawn between audit fees in the public and private sectors in an analysis of audit fees by industry. Despite some key similarities, the study shows that a number of differences exist between private and public sector audit fee models. In particular, we find no evidence of Big 6 (or mid–tier) auditor premiums, but we do find a significant negative relationship between audit and consultancy fees providing support for the ‘knowledge spill–over’ hypothesis. In addition, the fees charged to trusts appear significantly lower than their private sector counterparts, despite trust auditors having additional duties to perform. Possible explanations for this finding are offered in the paper.

Suggested Citation

  • Mark A. Clatworthy & Howard J. Mellett & Michael J. Peel, 2002. "The Market for External Audit Services in the Public Sector: An Empirical Analysis of NHS Trusts," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(9‐10), pages 1399-1439.
    • Handle: RePEc:bla:jbfnac:v:29:y:2002:i:9-10:p:1399-1439
    DOI: 10.1111/1468-5957.00475
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    Cited by:

    1. Giroux, Gary & Jones, Rowan, 2011. "Measuring audit quality of local governments in England and Wales," Research in Accounting Regulation, Elsevier, vol. 23(1), pages 60-66.
    2. S. Verbruggen & J. Christiaens & A. Reheul & T. Van Caneghem, 2011. "Audit pricing in a reformed nonprofit market," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/764, Ghent University, Faculty of Economics and Business Administration.
    3. Xue, Bai & O'Sullivan, Noel, 2023. "The determinants of audit fees in the alternative investment market (Aim) in the UK: Evidence on the impact of risk, corporate governance and auditor size," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 50(C).
    4. Xue, Bai & O'Sullivan, Noel, 2013. "Further evidence on the determinants of audit pricing in universities," Accounting forum, Elsevier, vol. 37(3), pages 196-212.
    5. Michael E. Bradbury & Gary Monroe, 2017. "Large audit firm premium and audit specialisation in the public sector," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(3), pages 657-679, September.
    6. David C. Hay & W. Robert Knechel & Norman Wong, 2006. "Audit Fees: A Meta†analysis of the Effect of Supply and Demand Attributes," Contemporary Accounting Research, John Wiley & Sons, vol. 23(1), pages 141-191, March.
    7. Mark A. Clatworthy & Michael J. Peel, 2007. "The Effect of Corporate Status on External Audit Fees: Evidence From the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 169-201, January.
    8. Ballantine, Joan & Forker, John & Greenwood, Margaret, 2008. "Public and private sector auditors and accruals quality in English NHS hospital Trusts," The British Accounting Review, Elsevier, vol. 40(1), pages 28-47.
    9. Mark A. Clatworthy & Howard J. Mellett & Michael J. Peel, 2008. "Changes in NHS Trust Audit and Non-Audit Fees," Public Money & Management, Taylor & Francis Journals, vol. 28(4), pages 199-205, August.
    10. Carrera, Nieves & Mareque, Mercedes, 2023. "Does gender affect qualifying decisions? Evidence from public sector audits," Journal of Business Research, Elsevier, vol. 154(C).
    11. Michael Peel & Roydon Roberts, 2003. "Audit fee determinants and auditor premiums: evidence from the micro-firm sub-market," Accounting and Business Research, Taylor & Francis Journals, vol. 33(3), pages 207-233.

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