Audit fees and audit adjustments: evidence from Welsh local authorities

Abstract

This paper exploits the availability of pre-audit financial statements to investigate the scale and incidence of audit adjustments and their impact on audit fees in Welsh local authorities. Adjustments to the politically-sensitive general fund, which represent a significant proportion of all adjustments, are associated with increased audit fees. The authors also found that audit adjustments on average result in more conservative reporting of the surplus/deficit and the balance on the general fund, with the number and value of downward adjustments exceeding those of upward movements.

Keywords:

• Audit adjustments
• audit fees
• financial reporting
• local government
• Wales

Acknowledgements

Helpful comments were received from participants at the British Accounting & Finance Association conference 2014 and the European Accounting Association conference 2014, from the WAO and two anonymous referees. Financial support was provided by Cardiff Business School and the BAFA Special Interest Group on Public Services and Charities assisted by CIPFA. Research assistance was provided by Daegul Lung.

The views expressed by the authors do not necessarily reflect those of the WAO.

Notes

* Although ISA 260 requires auditors to disclose audit adjustments to those charged with governance, it was not in effect at the time of these studies. As a consequence of the publication of ISA 260, the auditor’s communication to those in governance represents an additional potential source of research data but, in the case of the private sector, remains subject to commercial and client confidentiality.

Additional information

Notes on contributors

Richard M. Baylis

Richard Baylis is a lecturer in accounting at Cardiff Business School, UK.

Margaret J. Greenwood

Margaret Greenwood is a lecturer in accounting at the University of Bath School of Management, UK.