Government contracts and audit fees

Abstract

Topics concerning government contracts have recently attracted much attention from researchers and the public because of the US government's significant spending on goods and services. In this study, we investigate whether audit fees are associated with audit clients' government contracts. We find that firms with a higher proportion of government sales to total sales pay higher audit fees than other firms. Our further analysis shows the audit premium is driven mainly by the federal government and local government contracts. We also show that local government contracts have a larger effect than federal government contracts on the determination of audit fees. Taken together, our findings enhance our understanding of a potential determinant of audit fees and imply that auditors may view firms with and without government contracts differently.

Government procurement contracts, external audit certification, and financing of small-and medium-sized enterprises

“…Several recent studies have sought to link external auditing with government contracts (Dao et al, 2023;Hope et al, 2021). For instance, Hope et al (2021) use WBES data to report that firms that have their A result reported by Dao et al (2023) that is relevant to our study is the observation that firms with government contracts tend to pay higher audit fees compared to those without government contracts.…”

“…However, the evidence is inconclusive, and some authors have recently called for research that explores the correlation between audit choices and other firm characteristics (Dedman et al, 2014;Lisowsky & Minnis, 2020). Thus, our third contribution relates to recent studies that have linked government procurement contracts with external audit certifications (Dao et al, 2023;Hope et al, 2021). These studies demonstrate that government monitoring incentives influence external audit certification (Hope et al, 2021) and that firms with government procurement contracts, when compared to those without, pay higher audit fees (Dao et al, 2023).…”

“…Another role of government procurement auditing relates to how it could influence the likelihood of firms engaging in external audit certification, the quality of financial reporting, and audit fees (Dao et al, 2023;Hope et al, 2021;Samuels, 2021). Others have linked this monitoring role with the quality of financial reporting practice (Samuels, 2021), suggesting that it could reduce information asymmetry and lead to increased transactional lending, which occurs when lending is based on the use of quantitative data, such as information from borrowers' balance sheets (Ferri et al, 2019).…”

“…Thus, our third contribution relates to recent studies that have linked government procurement contracts with external audit certifications (Dao et al, 2023;Hope et al, 2021). These studies demonstrate that government monitoring incentives influence external audit certification (Hope et al, 2021) and that firms with government procurement contracts, when compared to those without, pay higher audit fees (Dao et al, 2023). In contrast to these studies, we examine whether the two variables influence perceptions about finance access obstacles separately or in combination.…”

Annual report inquiry letters, disclosure of key audit matters and audit fees: Evidence from Chinese A-share listed companies

“…Company (Size) is an important factor that affects audit fees. This study measures a company's year-end total assets on a logarithmic scale, following existing research (Dao et al, 2022). Larger companies generally have more complex business operations, which imply higher potential risks.…”