Nonaudit Services and Governmental Financial Reporting Quality, Audit Quality, and Audit Efficiency: Evidence from the North Carolina Municipal Audit Market

SUMMARY We analyze the association between nonaudit services and upcharges, additional fees charged at the conclusion of the audit, and audit/financial reporting quality for North Carolina municipal governments. Nonaudit services are allowed with appropriate safeguards for audits under AICPA auditing standards, including governmental audits. The impact of the auditor providing financial statement preparation services on audit/reporting quality is mixed. These services are associated with a higher likelihood of a government receiving the GFOA CAE, a proxy for high reporting quality. However, these services are associated with a higher likelihood of receiving a letter of deficiency from the government monitoring agency, a proxy for low reporting quality. Auditor provided bookkeeping services are positively associated with on time reporting. Upcharges are negatively associated with the CAE award, but also negatively associated with letters of findings, suggesting upcharges help address reporting problems to comply with state reporting requirements. Data Availability: Data are available from the authors on request. JEL Classifications: M42; M48.