1 Introduction
A large number of studies explain the determination of audit fees in public corporations (e.g. Simunic
1980; Holm and Thinggaard
2014; André et al.
2016), private corporations (e.g. Willekens and Achmadi
2003; Hope and Langli
2010; Sundgren and Svanström
2013) and public sector organizations (e.g., Baber
1983; Baber et al.
1987; Johnsen et al.
2004; Basioudis and Ellwood
2005a,
b; Collin et al.
2017). However, in this study, we focus on a particular category of companies, namely municipal corporations. During the last decades, local governments have gradually reduced direct forms of management in favour of various forms of corporatisation, public–private partnership and contracting out (Agrento et al.
2010; Tagesson and Grossi
2012).
According to Collin et al. (
2009), these corporations “are located in a twilight zone, being both private in one sense, acting according to the legislation of joint stock companies, and public in another sense, oriented towards fulfilling the needs of the municipal citizenry”. Thus, municipal corporations are examples of hybrid organizations with a combination of public and private characteristics and objectives and they are subjected to demands from both public and private sectors (Thomasson
2009a), operating at the intersection of the market and the public sector (Grossi and Thomasson
2015). Despite a period of increased hybridity and interest in hybrid organizations, the phenomenon is still not very well researched and the literature remains sparsely spread across many academic disciplines (Billis
2010) this also applies to the audit fee research area (Hay
2013).
In line with previous research, we build on Simunic (
1980) considering the audited organization as well as the audit market, this will be discussed in more detail in the methodology section. The aim of this study is to examine whether municipal ownership is a factor that affects and determines audit fees.
The remainder of the paper is structured as follows: in the next section we give a brief description of the institutional setting for municipally-owned corporations. The theory section follows with the derivation of hypotheses. The next sections describe the empirical method and the analysis. The article ends with discussion, conclusions and suggestions for further research.
2 Theory and hypothesis development
The demands facing hybrid organizations are often contradictory, which generates ambiguity (Kickert
2001). By having a multidimensional goal structure, hybrid organizations often need to handle conflicting demands related to, for example organizational effectiveness, profitability or different societal goals (Lindqvist
2013; Grossi et al.
2017). In addition to multidimensional goals, auditors as well as managers also have to consider and balance the demands from different, and sometimes heterogeneous, stakeholders (e.g. Jansson
2005; Calabró et al.
2013). That the corporations are part of a political context could lead to increased audit costs. Political conflicts (Deis et al.
1992) and competition between different political representatives and parties (Baber
1990; Cohen and Leventis
2013) raise demands for monitoring and auditing effort, implying increased audit fees.
The public viability and politicized environment may increase the reputation risk and audit effort for auditors (Redmayne et al.
2010; Cohen and Leventis
2013). In a Swedish context where the risk of litigation is perceived as low (Svanström
2013; Alexeyeva and Svanström
2015) auditors still have incentives to maintain high audit quality in order to avoid reputational losses (Skinner and Srinivasan
2012).
1 As a consequence of bad publicity (for example, related to a low-quality audit within a municipal company or a company failure) the public may lose the confidence, both in the auditor and in the financial reports of the company (Barton
2005). Regarding negative media exposure due to unethical behaviour, the hybridisation has reduced the ability for citizens to get access to public documents, as municipal corporations need to consider both public and civil law (Gissur O Erlingsson et al.
2008; Shaoul et al.
2012). According to Agrento et al. (
2010) this can sometimes create conflicts, as the legislation for corporations and local governments are based on different presumptions. A lower degree of transparency increases the risk of corrupt behaviour and abuse of power (Linde and Erlingsson
2013). In the end this affects the auditor who is responsible for considering the risk of material misstatement due to error and fraud (DeZoort and Harrison
2016). Maintaining public confidence is essential as the audit process is largely non-transparent and it is impossible for a third party to assess the quality of a given audit (Hennes et al.
2014). A loss in reputation for the audit firm will impair the ability to keep hold of current clients and attract new ones (Defond and Zhang
2014). Due to a greater demand for audit quality, Skinner and Srinivasan (
2012) find evidence that larger clients and those with growth opportunities are more likely to leave an audit firm that have suffered from a reputational loss. Regarding the procurement of audit service for municipal corporation audit, firms have incentives to consider reputational risk when they submit tenders. Since there are limited opportunities to adjust audit fees “after the fact” to cover reputational losses, auditors need to act preventively and incorporate potential losses into the audit fee (Simunic and Stein
1996).
In the Swedish context, the principle of openness may increase the reputation risk, as may the fact that the municipal auditors have a right to appoint a lay auditor that (in addition to the external auditor) will express his or her own opinion about the adequacy of internal controls. When the auditor is aware that a lay auditor will perform a partly parallel audit, the auditor will probably be more careful in order to avoid the risk of making mistakes which are then detected by the lay auditor. One specific area that certainly will be audited by all appointed auditors and require special attention is internal controls (SALAR
2017). Accuracy requires time, which may lead to increased audit costs. Consequently, the combination of public and private characteristics of hybrid organizations may lead to additional audit effort and thus increased audit fees.
However, according to Jensen et al. (
2005), agency costs are sometimes perceived to be less prevalent in the municipal sector than in the private sector. The character of public property reduces the incentives for monitoring (Zimmerman
1977). Even though municipal corporations, in a sense, are private organizations that must comply with company law, accountability is claimed in a municipal context, a context where the degree of formal accountability in general is low (Knutsson et al.
2012). Reduced accountability within hybrid organizations (Billis
2010; André
2010) can partly be explained by the occurrence of different principal-agent relationships that are complex due to diverge expectations and demands from different stakeholders (Thomasson
2009b; Shaoul et al.
2012; Kankaanpää et al.
2014; Grossi and Thomasson
2015). An accountability gap thus exists (Sands
2006), which complicates the governance of the hybrid organization and creates an opportunity for managers and auditors to act in their own self-interest. A perceived low degree of accountability decreases the litigation risk and from a wealth maximization perspective the auditor will “perform an audit which will reduce the chance of a successful negligence suite to a level which is acceptable” (Sherer and Turley
1997 p. 60). Consequently, the combination of reduced accountability and a low litigation risk may lead to reduced audit effort and thus lower audit fees.
Regarding business risk, previous research (Bell et al.
2001; Niemi
2002; Kim and Fukukawa
2013) show that auditors respond to higher business risk either by increasing audit effort (increase in audit hours or use of more experienced staff) or by charging a risk premium (no increase in audit effort) which will cover potential losses. More specifically, client business risk is related to a wide spectrum of different factors (industry conditions, organizational structure and business processes) that all have the potential to affect the client´s ability to achieve its objectives (Erickson et al.
2000; Bell et al.
2008; Stanley
2011; Kim and Fukukawa
2013). Ultimately, the concept of client business risk is “associated with the entity´s survival” (Bell et al.
1997 p.15) both in the short and long term. Based on Markowitz (
1952) and modern portfolio theory, it can be argued that municipal corporations have a higher business risk compared to private firms, as they are unable to allocate assets to other geographical areas or differentiate among different classes of property (Viezer
2000; Boverket
2017). Private corporations are more adaptive to changed market conditions as they to a greater extent acquire and sell properties (Boverket
2017). From an audit perspective, executed acquisitions would likely have an impact on the risk assessment procedure and create an increased demand for additional audit. (ISA, 315). However, considering that the municipal corporations have a financially strong owner with almost endless resources due to its taxation capacity (Chan
2003; Jones and Pendlebury
2004) the debt side of capital can be expected to attract little attention since there is a credible tradition that municipal corporations do not go bankrupt (Collin and Tagesson
2010). Hence, the business risk of the municipal corporations must be considered as low, and in the end result in lower audit fees. By focusing on the financial statements and the administration of the management (according to ISA and generally accepted auditing standards in Sweden) the external auditors are able to restrict their mission and crucial parts of the hybrid complexity will be handled by the lay auditors.
In sum; the political and hybrid characteristics of the municipal corporation indicate a potential reputational risk that may lead to increased audit fees. However, on the other hand the municipal ownership implies a low business risk which suggests decreased audit fees.
Given the lack of directional clarity, we state the hypothesis to be tested in null form. We propose:
4 Analysis and findings
4.1 Findings from quantitative analysis
The descriptive statistics are presented in Table
2. The table includes descriptive statistics of all variables used in the audit fee models.
Table 2
Descriptive statistics (n = 489)
Dependent variable
|
Natural logarithm of total audit fees SEK (AFEE) Mean/S.D | 4.60/1.02 |
Independent variable
|
Municipal corporation (MUNICIPAL_OWN) Yes (1) No (0) | 249 (50.9%) 240 (49.1%) |
Control variables
|
Natural logarithm of total assets SEK (ASSETS) Mean/S.D. | 12.84/1.57 |
Inventory and receivable divided by total assets (INVREC) Mean/S.D | 0.03/0.09 |
Corporations that have at least one subsidiary (SUBS) Yes (1) No (0) | 225 (46.0%) 264 (54.0%) |
Debt to equity ratio (DE) Mean/S.D. | 15.6/77.52 |
Modified audit opinion (OPINION) Yes (1) No (0) | 7 (1.4%) 482 (98.6%) |
Negative net income during any of the last two years (LOSS) Yes (1) No (0) | 118 (24.1%) 371 (75.9%) |
Corporations possessing an financial guarantee (GUARANTEE) Yes (1) No (0) | 52 (10.6%) 437 (89.4%) |
Change of signing audit firm during any of the last two years (AUDCHA) Yes (1) No (0) | 27 (5.5%) 462 (94.5%) |
Free cash flow divided by total assets (FCF) Mean/S.D | 0.04/0.06 |
Non-audit services purchased from incumbent audit firm (NAS) Yes (1) No (0) | 364 (74.4%) 125 (25.6%) |
Audit firm | |
PwC (PWC) | 175 (35.8%) |
KPMG (KPMG) | 85 (17.4%) |
EY (EY) | 106 (21.7%) |
Deloitte (DELOITTE) | 33 (6.7%) |
Other audit firms (OAF) | 90 (18.4%) |
Municipal corporations with PWC as signing audit firm PWC (PWC_MUNICIPAL) | 111 (44.6%) |
Private corporations with PWC as signing audit firm (PWC_PRIVATE) | 64 (26.7%) |
As shown in Table
2, the total sample of 489 corporations consists of 249 (50.9%) municipal and 240 (49.1%) private corporations. The mean of AFEE and ASSETS is 4.6 (12.8) with a standard deviation of 1.02 (1.57). 46% of all corporations have at least one subsidiary and 3% of the total assets consist of inventory and receivables. Only 1.4% of all corporations in the sample received a modified audit opinion during year 2012 and a little more than 50 corporations were secured by a financial guarantee. During the period 2011–2012, 24.1% of all corporations reported a negative net income and during the same period 5.5% or 27 corporations changed their signing audit firm.
In 2012, almost three quarters (74.4%) of all corporations purchased non-audit services from their incumbent audit firm. More than 35% of all corporations in the sample have PWC as their signing audit firm. A market share of more than 44% for municipal corporations and of 26% for private corporations makes PWC a market leader among all of the audit firms. EY has a market share of 21.7%, followed by other audit firms 18.4%, KPMG 17.4% and DELOITTE 6.7%.
As shown in Table
3, a correlation matrix was conducted in order to examine correlation between the variables in the model. The dependent variable AFEE has a strong positive correlation with ASSETS (.689) and a more moderate positive correlation to SUBS (.456) and NAS (0.211). Considerable correlation, close to 0.7, can be observed between some of the independent variables; to examine potential problems with multicollinearity, a variance inflation factor test was performed. All of the VIF-values are below 2.5 with a maximum VIF-value of 1.636 for model 1 and 2.173 for model 2. Low VIF-values decrease the likelihood of serious multicollinearity.
Table 3
Correlation table (Pearson correlations) n = 489
1 | AFEE |
1
| | | | | | | | | |
2 | MUNICIPAL_OWN | .069 |
1
| | | | | | | | |
3 | ASSETS | .689** | .311** |
1
| | | | | | | |
4 | INVREC | − .015 | − .246** | − .290** |
1
| | | | | | |
5 | SUBS | .456** | − .308** | .260** | .093* |
1
| | | | | |
6 | DE | − .144** | − .082† | − .008 | − .013 | − .126** |
1
| | | | |
7 | OPINION | − .061 | − .123** | − .157** | .076† | − .042 | − .009 |
1
| | | |
8 | LOSS | − .052 | − .096* | − .109* | .079† | .026 | .137** | .013 |
1
| | |
9 | GUARANTEE | .065 | .339** | .135** | − .082† | − .119** | − .031 | − .042 | − .024 |
1
| |
10 | AUDCHA | .038 | .148** | .115* | − .062 | − .079 | − .024 | − .029 | − .053 | .004 |
1
|
11 | FCF | − .071 | − .051 | − .088 | .065 | − .009 | − .009 | − .082† | − .227** | .008 | − .038 |
12 | NAS | .211** | .090* | .143** | .077† | .071 | − .020 | .031 | − .075 | .050 | − .002 |
13 | KPMG | .040 | .029 | .056 | .058 | .064 | − .049 | − .010 | .006 | .052 | − .064 |
14 | EY | .034 | .080† | .129** | − .047 | − .077 | .023 | .020 | − .018 | − .004 | .112* |
15 | DELOITTE | − .055 | − .029 | − .015 | − .036 | − .085 | .110* | − .032 | − .056 | − .040 | .113* |
16 | OAF | − .166** | − .325** | − .240** | .077† | .123** | − .037 | .076† | .028 | − .112* | − .115* |
17 | PWC | .102* | .187** | .048 | − .049 | − .039 | − .008 | − .054 | .018 | .075 | − .012 |
18 | PWC_MUNICIPAL | .057 | .529** | .112* | − .131** | − .173** | − .033 | − .065 | − .041 | .180** | .020 |
19 | PWC_PRIVATE | .073 | − .395** | − .075† | .093* | .165** | .030 | .004 | .079 | − .134** | − .041 |
1 | AFEE | | | | | | | | | |
2 | MUNICIPAL_OWN | | | | | | | | | |
3 | ASSETS | | | | | | | | | |
4 | INVREC | | | | | | | | | |
5 | SUBS | | | | | | | | | |
6 | DE | | | | | | | | | |
7 | OPINION | | | | | | | | | |
8 | LOSS | | | | | | | | | |
9 | GUARANTEE | | | | | | | | | |
10 | AUDCHA | | | | | | | | | |
11 | FCF | 1 | | | | | | | | |
12 | NAS | .043 | 1 | | | | | | | |
13 | KPMG | − .031 | − .028 | 1 | | | | | | |
14 | EY | − .016 | − .033 | − .241** | 1 | | | | | |
15 | DELOITTE | − .004 | − .029 | − .123** | − .142** | 1 | | | | |
16 | OAF | .006 | − .036 | − 218** | − .250** | − .128** | 1 | | | |
17 | PWC | .036 | .095* | − .342** | − .393** | − .201** | − .355** | 1 | | |
18 | PWC_MUNICIPAL | − .011 | .080† | − .247** | − .283** | − .145** | − .256** | .722** | 1 | |
19 | PWC_PRIVATE | .066 | .033 | − .178** | − .204** | − .104* | − .184** | .520** | − .209** | 1 |
Table
4 presents the results from the different regression (ordinary least squares) models, where model 1 and 2 use MUNICIPAL_OWN as an independent variable. Both model 1 and 2 have an adjusted R
2 value of 59.7%, significant F-statistics (0.000), 489 observations and VIF-values lower than 2.5. In model 1, each of the Big-4 audit firms was treated separately and other audit firms were merged into one category (OAF). PWC was used as a reference variable. In model 2, two new control variables were included in order to examine whether PWC was able to charge an audit fee premium both in municipal corporations and private corporations.
Table 4
Regression results
Independent variable |
MUNICIPAL_OWN | | − 0.166* | 0.075 | − 0.147† | 0.087 | | | | |
Control variables | | | | | | | | | |
ASSETS | + |
0.435**
| 0.023 |
0.442**
| 0.023 |
0.346**
| 0.034 |
0.461**
| 0.033 |
INVREC | + |
1.547**
| 0.356 |
1.573**
| 0.354 | 0.273 | 3.051 |
1.557**
| 0.409 |
SUBS | + |
0.487**
| 0.070 |
0.474**
| 0.069 |
0.293**
| 0.083 |
0.690**
| 0.112 |
DE | + | − 0.002** | 0.000 | − 0.001** | 0.000 | − 0.002 | 0.002 | − 0.001** | 0.000 |
OPINION | + | 0.312 | 0.254 | 0.308 | 0.253 | | | 0.427 | 0.284 |
LOSS | + | 0.029 | 0.073 | 0.028 | 0.072 | 0.131 | 0.088 | − 0.087 | 0.113 |
GUARANTEE | − | 0.084 | 0.102 | 0.085 | 0.102 | 0.101 | 0.085 | | |
AUDCHA | − | − 0.031 | 0.133 | − 0.012 | 0.131 | − 0.060 | 0.126 | 0.037 | 0.337 |
FCF | − | − 0.401 | 0.484 | − 0.396 | 0.485 | − 0.397 | 0.867 | − 0.479 | 0.630 |
NAS | +/− |
0.197**
| 0.069 |
0.194**
| 0.069 | 0.043 | 0.085 |
0.269*
| 0.110 |
KPMG | +/− | − 0.179* | 0.087 | | | − 0.243* | 0.096 | − 0.036 | 0.148 |
EY | +/− | − 0.156† | 0.081 | | | − 0.089 | 0.087 | − 0.211 | 0.143 |
DELOITTE | +/− | − 0.139 | 0.126 | | | − 0.224 | 0.153 | − 0.042 | 0.198 |
OAF | +/− | − 0.286** | 0.090 | | | − 0.202 | 0.151 | − 0.267* | 0.125 |
PWC_MUNICIPAL | +/− | | |
0.192*
| 0.083 | | | | |
PWC_PRIVATE | +/− | | |
0.199*
| 0.096 | | | | |
Constant | | − 1.156 | 0.291 | − 1.440 | 0.280 | 0.038 | 0.451 | − 1.659 | 0.404 |
Observations | | n = 489 | | n = 489 | | n = 249 | | n = 240 | |
VIF - maximum | | 1.636 | | 2.173 | | 1.301 | | 1.580 | |
F-Statistic | | 49.208 | | 56.617 | | 14.920 | | 39.837 | |
Significance F-statistic | | 0.000 | | 0.000 | | 0.000 | | 0.000 | |
Adjusted R2 | | 59.7 | | 59.7 | | 42.2 | | 67.9 | |
According to the results of both model 1 and model 2, we reject the null hypothesis that municipal ownership does not affect and determine audit fees. In both models, municipal corporations pay approximately 15% lower audit fees compared to private corporations. Of the control variables, ASSETS, INVREC, SUBS and NAS show a significant positive relationship with the audit fees on a 1% level and DE a significant negative relationship on a 1% level. Compared to the non-Big 4 audit firms, PWC charges an audit fee premium of nearly 25% and compared to KPMG 16%. It is evident that PWC charges higher audit fees compared to all other audit firms (except DELOITTE) in the sample. In model 2, we find that PWC, compared to the other audit firms, charges higher audit fees both within municipal corporations and private corporations.
In order to further examine the determinants of audit fees at a more disaggregate level, we separated the full sample with regard to municipal (model 3) and private corporations (model 4). As none of the municipal corporations received a modified audit opinion during 2013, model 3 does not include OPINION as a control variable. For a similar reason, model 4 lacks GUARANTEE as a control variable. A comparison of the adjusted R-square values shows that there exist large differences between model 3 and 4, the explanatory power of the audit fee model is noticeably higher for private corporations (67.9%) than municipal corporations (42.2%). Even with regard to the audit fee determinants there exist significant differences between the audit fee models. The regression results show that two of the variables, ASSETS and SUBS, have significant positive coefficients, both in model 3 and 4. However, in model 4, additionally three variables show a significant relationship with the audit fees, INVREC and NAS have a significant positive relationship with the audit fees and DE a significant negative relationship. In model 3, PWC manages to charge higher audit fees compared to KPMG, and in model 4, compared to the non-Big 4 audit firms.
4.2 Findings from the interviews
One of the interviewed partners explicitly pointed out that there is an increased reputation risk to accept the audit of a municipal corporation, since these corporations often are closely examined and scrutinized by mass media:
If it is a municipal corporation the audit firm can be very exposed. If something happens in a municipal corporation it will cause a lot of media attention in different ways. This attention will affect the audit firm negatively. Therefore, the audit firm needs to consider a risk premium which takes into account negative media exposure, even if it´s not directly connected to their assignment. (Partner 3)
However, four out of five partners claimed that the audit fees should be lower in municipal corporations due to a reduced business risk and procurements of audit services. Municipal corporations normally have a good financial position, high solidity and in addition they also have dividend restrictions. One of the partners pointed out that municipal corporations do not acquire and sell properties to the same extent as private corporations, which is of great importance in the assessment of the business risk:
Regarding purchase and sale of real estate, there is not as much business happening in the municipal corporations as in the private corporations. Thus, you do not need to put as much focus on valuation issues in the municipal corporations. (Partner 1)
Regarding reputation risk he pointed out that during an audit you always select and evaluate samples of risk items for compliance and testing purposes. If you then find errors, this might imply increase in audit effort and indirectly higher audit fees. Regarding municipal corporations he especially pointed at the media’s interest for investigating and report on representation and study visits. Even if an error is not material per se, the political nature of the auditee can justify and motivate an extended review.
Another explanation why audit fees are lower in municipal corporations than in private corporations, which emerged during the interviews, was that municipalities are able to push prices by coordinating procurements for the municipality and the municipal corporations:
We have a somewhat standardized procedure regarding what we need to spend time on when we perform an audit. We evaluate how many members, specialists and experts that need to be a part of the team to carry out the audit assignment. […] Then we have to adapt the tender considering the market conditions. Based on all this we decide upon an indicative price. We are not allowed to offer a fixed price by law. (Partner 3)
If an audit firm win the tender both regarding the assistance of the municipal auditors (e.g. lay auditors) and the corporation, it is easier to coordinate the work between lay auditor and external auditor. According to the respondents this is the most common scenario and the interviews revealed that the external audit and the lay man audit usually are coordinated.
Normally I meet the layman auditor and his assistant at least twice a year to coordinate the work. Usually, the auditor who assists the layman auditor is from the same audit firm as I, which facilitates the work. (Partner 1)
5 Discussion and conclusions
The aim of the study was to examine whether municipal ownership is a factor that affects and determines audit fees. Our analyses clearly show that municipal housing corporations pay significantly lower (approximately 15%) audit fees than privately owned corporations in the same industry. One conclusion, based on this result, is that the audit firms price business risk and litigation risk higher than the reputation risk associated with the public viability and politicized environment of municipal corporations. Based on the results of this study and existing theory, lower audit fees within municipal corporations may be explained by four important aspects. First, a reduced number of property transactions will likely reduce the business risk and lead to lower audit effort. In contrast, executed acquisitions will lead to increased audit effort as more work is required and performed by senior managers and specialists. The second and third aspect concern reduced accountability within municipal corporations (Grossi and Thomasson
2015), and a low litigation risk which imply an opportunity for auditors to act in their own self-interest. The occurrence of an accountability gap thus increases the likelihood that self-interested auditors will limit the scope of their work and perform an audit that is below average standard. Fourth, our interviews reveal that municipal corporations are able to push down audit fees as a result of the procurement process. This is further supported by Tagesson et al. (
2015) who find evidence that price is a predominant criterion when municipalities procure audit services. Thus, it is possible that audit firms use a low-balling strategy to gain market shares or to retain important clients. Regarding reputation risk, the interviews indicated that it is a factor that always needs to be considered when the auditor selects items for evaluation and testing. However, if an error is detected in a municipal corporation, the auditor has to consider not only materiality but also the political implications.
As an industry leader, PWC manages to charge an audit fee premium of 15–25% compared to the majority of the audit firms used in the sample; a division between municipal corporations and private corporations shows that PWC exhibits a higher fee premium for private corporations. From a neoclassical perspective, a fee premium can be explained by superior audit quality, which justifies higher audit fees. Another plausible explanation is that PWC holds a unique market position with a large distance to its closest competitors (Numan and Willekens
2012). Insignificant results regarding the possession of a financial guarantee can be explained by the fact that it is very rare that a Swedish municipal corporation goes bankrupt. Regarding municipal corporations, the signing auditor is exposed to possible reputation loss rather than high financial risk.
Regarding the results of the different audit fee models, there exists a general explanatory power which applies to both municipal and private corporations. However, the audit fee model seems to be more adapted to private sector organizations as the adjusted R
2 is significantly higher for private corporations (67.9%) compared to municipal corporations (42.2%). Previous research (Hope and Langli
2010; Sundgren and Svanström
2013) show that the explanatory power of the audit fee model is reduced when shifting focus from public (80–85%) to private (50–55%) corporations. These results indicate that a well specified model for public corporations is reduced in explanatory power when transformed to other contexts. For example, considering municipal corporations the audit fee model could probably be developed further and adapted in order to consider municipal corporations’ conditions and characteristics of hybrid organization. Thus, the present study has some limitations and identifies some suggestions for future research. Our statistical model lacks a theory of interest group intermediation. As indicated by the interviews, a reasonable assumption is that interest groups, such as the media, are directed by their own interests and could even be assumed to influence the risk assessment and pricing of audit services in hybrid organizations (Redmayne et al.
2010). Another factor that emerged from the supplementary interviews with the partners from the audit firms was the municipal negotiation power due to coordinated procurements for the municipality and the municipal corporations. In a model designed to explain the audit fees in municipal corporations, this factor may be operationalized by the variables (1) total number of corporations in the municipal group and (2) the municipal budget for audit services.