Audit Firm Size and Audit Quality in Nonprofit Hospitals: Evidence from Circular A-133 Audits

The purpose of this study is to examine the association between audit firm size (Big 4 vs. non-Big 4) and audit quality for nonprofit hospitals receiving a Circular A-133 audit under the Single Audit Act. Defining audit quality as the probability that an auditor will both discover and report a breach in the client's accounting system (DeAngelo, 1981), we hypothesize that a higher quality auditor will identify and report more control deficiencies over financial reporting in compliance with a Circular A-133 audit. We employ logistic regression analysis to a crosssectional sample of 950 single audit reports for 311 nonprofit hospitals during 2007-2011. The results indicate significant differences between audit firms, with non-Big 4 auditors more likely to report internal control deficiencies than their Big 4 counterparts. In addition to audit firm size, certain client characteristics are found to significantly increase the probability of the disclosure of internal control concerns: smaller hospitals, higher leveraged hospitals, and 'high audit-risk' hospitals (as indicated by its auditor) are more likely to have reported internal control weaknesses, while the amount of total federal funds received and financial performance have no significant effect on the internal control deficiencies reported.