The determinants of audit fees - Evidence from the voluntary sector

Abstract

Given the growing demand for accountability in the public sector, there audit pricing issues in this sector. This study makes three contributions. First, it develops and estimates, for the first time, a model of audit fee determinants for the charity sector. As in previous private sector company studies, size, organisational complexity and audit firm location are the major determinants. A positive association between audit fees and fees for non-audit services is also observed. Chanty sector factors of empirical significance include the nature of the charity (i.e., grant-making Separate models for grant-making and fund-raising chanties reflect the relative complexity of the audit of fund-raising charities. Second, the lower auditor concentration in the charity sector market, compared to the private sector market, permits a more powerful test of whether large firms and/or auditor expertise are rewarded with a fee premium. In the more complex audit environment of fund-raising charities, the results show that Big Six audit firms receive higher audit fees expertise are rewarded with a fee premium over other non-Big Six firms. Finally, the study demonstrates that the charity audit fee rate is significantly lower than that of private sector companies; in fact it is approximately half. A change in the reporting of charity audit fees is proposed to reflect any element of 'charitable giving' by the audit firm.