Auditor Change and Auditor Choice in Nonprofit Organizations

As a result of the recent frauds and the U.S. Congress's passing of the Sarbanes-Oxley Act of 2002, more focus has been placed on the role of independent auditors in monitoring corporations. While the new rules are not directed toward nonprofit organizations, these organizations face many of the same monitoring concerns as their for-profit counterparts. Given their large reliance on public support through donations, it is imperative they maintain adequate levels of monitoring. This study looks at nonprofit organizations' auditor choice decisions—the factors associated with their decision to change auditors and the factors associated with the auditor selected if a change is made. Using multivariate regressions on data on almost 16,000 nonprofit organizations, I find changes in operational structure, management's reputation, and audit fee are all significant in determining whether an organization will change auditors. In addition, changes in operational structure, financing, and management contracting may have some effect on the type of auditor selected when a change is made.