Investigating the audit fee structure of local authorities in England and Wales

The purpose of this paper is to model and test the audit fee structure of local authorities in England and Wales, with particular interest in fees charged by the Big 4 and other private sector auditors. The Audit Commission, a national public body under Parliament, regulates local government audits in England and Wales. The Audit Commission sets audit standards, appoints the auditors, and establishes a formula to determine standard audit fees. Constrained by the standard audit fees, each local authority and its auditor negotiate the actual audit fees. The majority of audits are conducted by district auditors (public sector employees under the Audit Commission), although about 25% of local authorities are audited by one of six private auditors (including three of the Big 4). Regression results for financial year 2000/01 have high explanatory power and work well to explain fee differences. Model relationships are somewhat different from US counterparts (which is the context of most of the audit economics literature) and type of authority partially explains fee differences. OLS regression results indicate a Big 4 discount for local authority audits. Because of expected self-selection bias, the Heckman procedure is used to analyse the differences between private sector and public sector auditors, which indicates no selection bias for Big 4 firms, although bias is present for private firms as a whole and district auditors in some models. When fees are size-adjusted, results continue to show a Big 4 discount. The Big 4 discount was robust to other follow-up tests.