Financial reporting quality and audit quality in England public sector organisations

  • Ruijia Zhan

Student thesis: Doctoral ThesisPhD


In the context of radical austerity inspired reforms to the public sector in England, this thesis investigates the extent to which public sector organizations manipulate financial reports and audit firms mitigate management bias in public sector financial reports. A substantial body of literature finds that both public and not-for-profit managers manage ‘earnings’ to report small surpluses, while limited empirical studies have investigated audit quality from direct measures of audit adjustment or have provided evidence to examine if real activities are sacrificed in public sector organizations under new public management and privatization reform.
Under agency theory, auditors acting in the interests of their principal(s) would tend to reverse this bias. This thesis firstly exploits privileged access to pre-audit data to investigate the impact of audit adjustments on the pre-audit financial statements of English NHS Foundation Trusts over the period 2010-11 to 2014-15. This study finds evidence that auditors act to reverse management bias in the case of Trusts with a pre-audit deficit but finds no evidence that this is the case for Trusts with a pre-audit surplus. In the case of Trusts in surplus, these findings are consistent with auditors’ interests being aligned with management, rather than principals. Although an extensive literature has investigated accruals earnings management in the public sector, limited research has been conducted to examine real activity management. This thesis therefore provides a second study to complement the investigation of financial reporting quality for NHS FTs by examining if real activities are manipulated. This study finds that non-clinical discretionary expenditures are manipulated when pre-managed financial accounts are just below the regulatory threshold to avoid regulatory intervention. What’s more, this study adds to previous literature by providing evidence suggesting NHS FTs manage clinical expenditures to improve financial performance. Finally, this thesis tests another public sector organization, the local authority, to provide further evidence supporting the proposition that managers manipulate earnings and general fund balance to achieve small surplus reporting and effective use of resources targets. This study also fails to find evidence of audit adjustment to reduce management bias in local authorities, which raises again the question of the role of auditors in the public sector.
Date of Award1 Nov 2021
Original languageEnglish
Awarding Institution
  • University of Bath
SupervisorDavid Newton (Supervisor) & Dimitrios Gounopoulos (Supervisor)

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