Differences across audit firm types in assessments of non-profit organizations' federal compliance

This paper investigates whether different types of auditors provide different assessments of noncompliance with federal regulations and deficiencies in internal control structures in a financial statement and compliance audit setting. Audit firms are separated into three types---market leaders, non-market leader brand name, and non-brand name---with the expectation that market leaders provide the best assessments, and non-market leader brand name firms provide better assessments than non-brand name firms. While prior studies consistently indicate that users of financial statements and companies hiring auditors believe there are quality differences between auditors, there is little research on how these audit quality differences translate into specific differences in the auditors' assessments and judgments. Using a database of almost 77,000 compliance and financial statement audit results for non-profit organizations for the fiscal years 1997 through 2000, I find market leader and non-market leader brand name auditors report more noncompliance with federal regulations in the form of questioned costs and findings than non-brand name auditors, consistent with audit quality theory. I also find that the market leader brand name auditor reports more findings than non-market leader brand name auditors. However, in contrast to expectations, and after controlling for the number and extent of errors identified by the auditor, I find the market leader brand name auditor is marginally less likely (rather than more likely) than non-brand name auditors to qualify their report on an organization's compliance with federal regulations. I find no other differences between auditor types in their likelihood of qualifying their opinion on compliance with federal regulations. Also, in contrast to expectations, I find the market leader brand name auditor is marginally less likely to report deficiencies in internal controls than non-market leader brand name auditors who are significantly less likely to report internal control deficiencies than non-brand name auditors. Overall, these results provide mixed results on the quality effects of market leader and brand name auditors.