The Effect of Contracting-Out Audits on Resource Allocation and Efficiency in Public Sector Audits
46 Pages Posted: 16 Jul 2001
Date Written: Undated
Significant changes in public sector have impacted on the operations of government audit offices in several countries, notably, Australia, New Zealand, Canada, United Kingdom and the United States. Government audit offices are required to operate in a more contestable or market-like environment, where they are accountable for an efficient and effective provision of public sector audit. The purpose of this study is to compare the efficiency of in-house and contract-out arrangements to deliver financial audits in the public sector. This study examines the audit cost efficiency within the context of the current public sector arrangement at the state level in Western Australia (WA). The results for 178 public agencies in WA suggest that contract-out audits are more costly than in-house audits but the result is conditional on agency type. Specifically, for statutory authority audits, the costs of contract-out audits are, on average, significantly higher than in-house audits. For hospital audits, there is no significant difference in audit costs between contract-out and in-house arrangements. Sensitivity analyses reveal that the supervision costs incurred by the Auditor-General to monitor audit quality have a significant impact on the interpretation of the cost efficiency results.
Keywords: Cost efficiency; Public sector audits; In-house; Contract-out
JEL Classification: M49, L32
Suggested Citation: Suggested Citation