Auditor or Adviser? Auditor (In)Dependence and Its Impact on Financial Management

• Published date: 01 May 2021
• Author: Lang (Kate) Yang
• Date: 01 May 2021
• DOI: http://doi.org/10.1111/puar.13313

Research Article

Auditor or Adviser? 475

Abstract: Fiscal transparency entails government financial reporting and independent audits. This study postulates

and tests the dual functions of external auditors: an examiner who assesses government compliance with accounting

rules and an adviser who supplements government financial management capacity. Computational text analyses

show that localities, especially those with lower financial management capacity, are likely to adopt similar languages

in summarizing the governments’ financial conditions if they share the same auditor, suggesting auditor input in

government disclosure. The auditor advisory role intensifies with a longer tenure. Further analyses show that auditor

tenure is positively associated with the timeliness of audited financial reports. On the other hand, a long tenure reduces

the likelihood of auditors’ identifying internal control deficiencies and thus points to accountability concerns. These

findings highlight the importance of government capacity-building in fiscal transparency initiatives and the unique

challenges to auditor independence in the public sector.

Evidence for Practice

• When two local governments contract with the same independent auditor, their financial reporting

languages are similar. This finding suggests that auditors advise on government financial reporting.

• The auditor’s advisory rule is stronger among local governments with fewer financial management staff and

when the auditor tenure is longer.

• A longer auditor tenure is associated with prompter preparation of audited financial reports but a lower

probability of internal control deficiency findings. In contracting and consulting with the same auditor over

time, local governments prioritize reporting timeliness, which is mandated by higher-level governments, over

audit quality.

• Financial transparency initiatives in the public sector need to balance the examiner and adviser roles of

auditors. Cultivating internal financial management capacity is likely to reduce public organizations’ reliance

on auditor advice and improve the accountability of independent audits in the long run.

Researchers of good governance postulate

transparency as the foundation of public-

sector accountability (Fox2007; Greiling and

Spraul2010; Kim et al.2005). Required by citizens,

elected officials, higher-level governments, or laws and

institutions, public organizations provide information

about the topics they are accountable for, which in

turn becomes the basis for scrutiny and change. One

of the most widely investigated objects of transparency

is the disclosure of how governments allocate

and spend their financial resources. A consensus

emerges in the literature that fiscal transparency

leads to prudent financial management and reduces

corruption (Alt and Lassen2006; Cucciniello,

Porumbescu, and Grimmelikhuijsen2017).

A precondition of transparency is that stakeholders

can believe in the quality of the disclosed

information (Baltaci and Yilmaz2006; Harrison and

Sayogo2014). While auditors do not directly review

the accuracy of government financial data, they assess

whether public organizations comply with reporting

rules and regulations and have a procedure in place

to prevent fraud. The value of an external audit rests

in its “independence”: the audit only provides fair

assessments if free from any influence by the auditee.

Research on the auditor’s role in the public sector

and the implication on public management

and accountability is scarce (Harris2005). This

article situates the discussion in the context of

intergovernmental transparency mandates and

management capacity constraints. Higher-level

governments often impose financial disclosure and

auditing requirements on local governments, focusing

particularly on the timely release of audited financial

reports. In contrast with these requirements is the

lack of financial management capacity among many

Lang (Kate) Yang

George Washington University

Auditor or Adviser? Auditor (In)Dependence and Its Impact

on Financial Management

Lang (Kate) Yang is assistant professor in

the Trachtenberg School of Public Policy and

Public Administration at George Washington

University. Her research focuses on public

finance, financial management, and

government transparency.

Email: langyang@gwu.edu

Public Administration Review,

Vol. 81, Iss. 3, pp. 475–487. © 2020 by

The American Society for Public Administration.

DOI: 10.1111/puar.13313.