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Contracting Out Municipal Auditing

This article evaluates the contracting out of municipal auditing. It draws upon the organizational economics (theory of the firm) tradition, specifically agency theory and transaction cost analysis. In order to systematically assess the effects of contracting out municipal auditing, a conceptual framework of municipal auditing is developed. Some empirical evidence is then discussed in relation to this framework. In general, enhanced competition and contracting out municipal activities seem to lead to an increase in both cost-efficiency and effectiveness. However, there are potential problems related to market contracting of municipal auditing, i.e. the prospect of reduced auditor independence, reduced audit quality and in particular less performance auditing. Finally, the article presents suggestions for future research, indicating the need for further empirical studies, especially on how the contracting out of municipal auditing affects auditor independence and performance auditing, and how mixed ownership/plural governance structures affect audit outcomes.