Auditor size and internal control reporting differences in nonprofit healthcare organizations

Abstract

We investigate whether auditor size is associated with the disclosure of internal control exceptions among Circular A-133 audits of nonprofit healthcare organizations. Our analysis is motivated by recent growth and transparency concerns within the sector. Using a sample of 1,180 audit reports from 2004 to 2008, we find evidence that audits performed by Big 4 firms are less likely to disclose internal control weaknesses than those performed by smaller firms. Additional analyses indicate this relation only remains statistically significant for a subsample of small organizations, possibly due to greater selectivity or lower efforts by the Big 4 auditors. We discuss the implications of these findings from an audit quality, market dominance, and client size perspective. The results are relevant to hospital financial managers seeking high quality audits at low cost.

The Influence of Institutional Regulatory Pressure on Nonprofit Hospital Audit Quality

“…With respect to ICD as a proxy for audit quality, non-Big 4 audit firms provide higher pre-and post-REGP audit quality than their Big 4 counterparts. These findings are consistent with the pre-SOX nonprofit literature (Keating et al 2005;Petrovits et al 2011) and the results of Lo´pez et al (2013) suggesting that post-REGP nonprofit healthcare audits of the Big 4 audit firms are less likely to disclose internal control exceptions compared to the audits of smaller audit firms. However, the findings using ABSDA as a proxy for audit quality are consistent with previous forprofit research that generally concludes that large audit firms provide audit quality (Francis 2004;Lawrence et al 2011).…”

“…Our findings show that the audit quality of nonprofit hospitals (measured by ICD and ABSDA) improves from the pre-to post-REGP period, suggesting that audit firms have responded to regulatory pressures and, as institutional theory purports, enhanced their audit and engagement practices for the benefit of nonprofit hospitals and stakeholders. The results are in line with an emerging body of research supporting an increase in audit quality for post-SOX nonprofit (Lo´pez and Peters 2010;Lo´pez et al 2013) and for-profit (Lawrence et al 2011) entities and provide evidence that, given the increased audit quality, extending SOX-like regulation to nonprofit entities may not be critical at this time.…”

“…We find that the audit quality of nonprofit hospitals improved from the pre-to post-REGP period, suggesting that audit firms have responded to regulatory pressures and, as institutional theory purports, have enhanced their audit and engagement practices for the benefit of nonprofit hospitals and stakeholders. The results are consistent with an emerging body of research supporting an increase in audit quality of post-SOX nonprofit (Lo´pez and Peters 2010;Lo´pez et al 2013) and for-profit (Lawrence, Minutti-Meza, and Zhang 2011;Coates and Srinivasan, 2014) organizations and provide evidence that SOX and the subsequent increased nonprofit regulatory attention have also enhanced the audit quality of nonprofit entities. Therefore, additional regulations may not be necessary for nonprofit entities because improved audit quality indicates that the desired nonprofit oversight and accountability may have already been attained.…”

A Comprehensive Analysis of Findings from Single Audits: The Implications of Auditee Type and Auditor Expertise

“…Eldenburg and Krishnan (2003) (Tate 2009). Other studies in the nonprofit setting report similar results, i.e., large firms are associated with fewer internal control deficiencies (Keating et al 2005;Petrovits et al 2011;Lopez, Rich, and Smith 2013;Pridgen and Wang 2012). Finally, we note that while some studies separately identify other expert auditors, i.e., specialists, the impact of low expertise has not been previously considered.…”

CEO financial background and internal control weaknesses

“…Auditor type can affect the internal controls because large auditors may enjoy more independence given their diversified client portfolio and thus exert more pressure on management to improve the internal control quality (Khlif & Samaha, ). Lopez, Rich, and Smith () find that firms audited by Big‐4 auditors have fewer ICWs. In addition, an auditor change increases the likelihood of ICWs (Chen, Lai, Liu, & McVay, ).…”