Audit Fees and Nonaudit Fees in the Governmental Sector : A Self-Selection Analysis

We use a self-selection model to examine differences in audit fees between purchasers and non-purchasers of nonaudit services for a sample of 165 Michigan governmental units. Understanding the relationship between audit fees and nonaudit fees is important because nonaudit services potentially influence audit quality in the governmental sector. We find significant differences between purchasers and non-purchasers of additional services which influence audit fees. Purchasers of additional services have more audit adjustments and less experienced financial personnel than non-purchasers, suggesting that purchasers experience more accounting problems. Consistent with previous private sector research, we find a positive relationship between audit fees and nonaudit fees. Further analysis by auditor type suggests that the relationship between audit fees and nonaudit fees is negative for Big 6 auditors, but positive for other audit firms. This difference in the relationship between audit fees and nonaudit fees by auditor type may be due to differences in the nature of the consulting services demanded, or differences in the contractual arrangements for audit and nonaudit services