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

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. Copyright Blackwell Publishers Ltd 2002.

The determinants of audit fees—evidence from the voluntary sector

“…For quoted companies, Chan et al (1993) found a premium of 36.7%, Ezzamel et al (1996), 23.5%, and for independent unquoted firms Brinn et al (1994) found a 28.0% premium. By contrast, neither Che-Ahmad and Houghton (1996), in their study of medium-sized UK companies, nor Clatworthy et al (2000) in their study of UK National Health Service Trusts found any evidence of a large audit firm premium.…”

External audit in the National Health Service in England and Wales: A study of an oversight body’s control of auditor remuneration

“…There have been many research studies examining the nature of the company fee market, but few have investigated the public sector audit market (e.g. Beck and Barefield, 1986;Baber et al, 1987;Rubin, 1988;Copley, 1989;Beattie et al, 2002) and only one has examined NHS audit fees (Clatworthy et al, 2002).…”

“…10 Clatworthy et al (2002) include comparisons of auditor type but not within individual audit firms and not using sub-samples. The use of our auditor size classes provides a richer test of the association between auditor size and audit fees than in Clatworthy et al (2002).…”

“…The 369 NHS trusts in England and Wales paid £33m to their incumbent external auditors for work undertaken in relation to the financial year ended 31 March 2001. Many of the determinants of the model are based on (or extensions of) determinants used in company audit fee models, but we have introduced a number of new variables not previously examined in a UK context or the only previous study of NHS audit fees (Clatworthy et al, 2002). In particular we have undertaken rigorous analysis of the type of auditor and the total payment to the auditor: the previously examined Big 5, non-Big 5 differentiation has been extended to examine also second-tier firms and District Auditors.…”

The pricing of audit and non-audit services in a regulated environment: a longitudinal study of the UK life insurance industry

“…Some empirical studies find a negative relation between audit and non-audit fees (Clatworthy et al, 2002;Fields et al, 2004), or report a lack of association (Abdel-Khalik, 1990). Studies using simultaneous equation methods accounting for bi-directional causality report a positive (Antle et al, 2006;McMeeking et al, 2006) or non-association (Whisenant et al, 2003;Hay et al, 2006a) between audit and non-audit fees.…”