Another look at auditing by the state governments

Agency theory suggests that incentives to monitor elected officials depend in part on the competitiveness of political markets. Consistent with this view, prior studies report statistically significant cross-sectional relations between amounts committed to auditing and measures of political competition. This study considers both cross-sectional and time-series relations between audit budgets and political competition measures for the U.S. State governments. Results indicate that statistically significant relations that exist in 1980 no longer exist in 1989. Changes in the states’ audit budgets are correlated with changes in state political competition, however. One explanation for these results is that changes in Federal regulations, coupled with resurgent interest in the financial affairs of state and local governments, obscure or distort cross-sectional relations between auditing and political competition.