A Municipal Audit Fee Model Using Structural Equation Modeling

Abstract

The purpose of this project is to model municipal audit fees using an audit economics framework and then analyze this conceptual framework empirically using structural equation modeling, because structural equation models are excellent for examining complex and interdependent environments. The sample is large cities using 1996 data. The theoretical model uses five constructs to explain audit fees: (1) client size, (2) complexity of client operations, (3) financial risks including demographic characteristics, (4) auditing factors, and (5) governance structure. The final model includes six variables directly related to audit fee plus five mediating variables. The results demonstrate that SEM modeling can explain audit fees and provides more information on how the highly correlated independent variables are interrelated in the context of explaining audit fee levels.