Auditor choice in the voluntary sector: The case of smaller organizations

Abstract

Smaller organizations are less likely than larger organizations to engage a high-quality auditor to signal credibility to potential donors, but they may still have incentives to engage a high-quality auditor (for instance, to protect themselves from a potential reputational loss). In this context, we find that fundraising voluntary organizations, which are particularly likely to be exposed to reputational concerns, because a poor reputation may have a direct negative impact on fundraising, are more likely to engage a high-quality auditor than are other voluntary organizations. Additional analysis reveals that fundraisers are more likely to engage a Big 4 auditor than an industry specialist; this suggests that the motivation for engaging a high-quality auditor may be to use the auditor as a scapegoat rather than to ensure superior knowledge and advice. We find that debt ratio, organizational complexity, size and financial health are also drivers of auditor choice in small, voluntary organizations.

Auditor choice in the voluntary sector: The case of smaller organizations