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.