IDEAS home Printed from https://ideas.repec.org/a/bla/abacus/v54y2018i3p319-352.html
   My bibliography  Save this article

Demand for and Assessment of Audit Quality in Private Companies

Author

Listed:
  • Adam Esplin
  • Karim Jamal
  • Shyam Sunder

Abstract

Financial statement audits are mandated in most countries, thus making it difficult to distinguish between auditing driven by private incentives versus that driven by regulation. Who would ask for an audit, and how would its quality be assessed in the absence of regulation? Many private companies in Canada get their financial statements audited even though the law does not require it. In this field study, we conduct interviews to discover reasons for demanding an audit, and criteria used to assess their quality. Our study reveals that both internal stakeholders (management, boards, and employees) as well as external stakeholders (customers, banks, and private equity firms) request audits. Users evaluate audit quality based on a variety of criteria such as the auditor's accounting expertise, the absence of errors, the fees involved, risk assessments offered, allocation of effort, internal control, and general business advice. Implications for audit regulations are discussed.

Suggested Citation

  • Adam Esplin & Karim Jamal & Shyam Sunder, 2018. "Demand for and Assessment of Audit Quality in Private Companies," Abacus, Accounting Foundation, University of Sydney, vol. 54(3), pages 319-352, September.
    • Handle: RePEc:bla:abacus:v:54:y:2018:i:3:p:319-352
    DOI: 10.1111/abac.12138
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/abac.12138
    Download Restriction: no
    File URL: https://libkey.io/10.1111/abac.12138?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
    2. Michael Minnis, 2011. "The Value of Financial Statement Verification in Debt Financing: Evidence from Private U.S. Firms," Journal of Accounting Research, Wiley Blackwell, vol. 49(2), pages 457-506, May.
    3. Karim Jamal & Michael Maier & Shyam Sunder, 2003. "Privacy in E‐Commerce: Development of Reporting Standards, Disclosure, and Assurance Services in an Unregulated Market," Journal of Accounting Research, Wiley Blackwell, vol. 41(2), pages 285-309, May.
    4. Simunic, Da, 1980. "The Pricing Of Audit Services - Theory And Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 161-190.
    5. Demski, Joel S. & Feltham, Gerald A., 1994. "Market response to financial reports," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 3-40, January.
    6. Watts, Ross L & Zimmerman, Jerold L, 1983. "Agency Problems, Auditing, and the Theory of the Firm: Some Evidence," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 613-633, October.
    7. Gilles Hilary & Sudipto Dasgupta & Xing Chang, 2009. "The Effect of Auditor Quality on Financing Decisions," Post-Print hal-00481935, HAL.
    8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    9. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    10. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
    11. Alexander Dyck & Adair Morse & Luigi Zingales, 2010. "Who Blows the Whistle on Corporate Fraud?," Journal of Finance, American Finance Association, vol. 65(6), pages 2213-2253, December.
    12. Leftwich, Richard, 1980. "Market failure fallacies and accounting information," Journal of Accounting and Economics, Elsevier, vol. 2(3), pages 193-211, December.
    13. Blackwell, DW & Noland, TR & Winters, DB, 1998. "The value of auditor assurance: Evidence from loan pricing," Journal of Accounting Research, Wiley Blackwell, vol. 36(1), pages 57-70.
    14. Bruce K. Behn & Joseph V. Carcello & Dana R. Hermanson & Roger H. Hermanson, 1999. "Client Satisfaction and Big 6 Audit Fees," Contemporary Accounting Research, John Wiley & Sons, vol. 16(4), pages 587-608, December.
    15. Krista Fiolleau & Kris Hoang & Karim Jamal & Shyam Sunder, 2013. "How Do Regulatory Reforms to Enhance Auditor Independence Work in Practice?," Contemporary Accounting Research, John Wiley & Sons, vol. 30(3), pages 864-890, September.
    16. D. Eric Hirst & Lisa Koonce, 1996. "Audit Analytical Procedures: A Field Investigation," Contemporary Accounting Research, John Wiley & Sons, vol. 13(2), pages 457-486, September.
    17. Petro Lisowsky & Michael Minnis & Andrew Sutherland, 2017. "Economic Growth and Financial Statement Verification," Journal of Accounting Research, Wiley Blackwell, vol. 55(4), pages 745-794, September.
    18. Karim Jamal & Hun‐Tong Tan, 2001. "Can Auditors Predict the Choices Made by Other Auditors?," Journal of Accounting Research, Wiley Blackwell, vol. 39(3), pages 583-597, December.
    19. Johnson, Paul E. & Grazioli, Stefano & Jamal, Karim, 1993. "Fraud detection: Intentionality and deception in cognition," Accounting, Organizations and Society, Elsevier, vol. 18(5), pages 467-488, July.
    20. Richard Clune & Dana R. Hermanson & James G. Tompkins & Zhongxia (Shelly) Ye, 2014. "The Nominating Committee Process: A Qualitative Examination of Board Independence and Formalization," Contemporary Accounting Research, John Wiley & Sons, vol. 31(3), pages 748-786, September.
    21. Hun†Tong Tan & Karim Jamal, 2006. "Managing Perceptions of Technical Competence: How Well Do Auditors Know How Others View Them?," Contemporary Accounting Research, John Wiley & Sons, vol. 23(3), pages 761-787, September.
    22. Karim Jamal, 2008. "Mandatory Audit of Financial Reporting: A Failed Strategy for Dealing with Fraud," Accounting Perspectives, John Wiley & Sons, vol. 7(2), pages 97-110, May.
    23. DeAngelo, Linda Elizabeth, 1981. "Auditor independence, `low balling', and disclosure regulation," Journal of Accounting and Economics, Elsevier, vol. 3(2), pages 113-127, August.
    24. William R. Kinney & Zoe‐Vonna Palmrose & Susan Scholz, 2004. "Auditor Independence, Non‐Audit Services, and Restatements: Was the U.S. Government Right?," Journal of Accounting Research, Wiley Blackwell, vol. 42(3), pages 561-588, June.
    25. Elisabeth Dedman & Asad Kausar & Clive Lennox, 2014. "The Demand for Audit in Private Firms: Recent Large-Sample Evidence from the UK," European Accounting Review, Taylor & Francis Journals, vol. 23(1), pages 1-23, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kenny Adedapo SOYEMI & Mariam Abosede TIAMIYU & Emily OMALE, 2023. "Audit Quality Attributes And Financial Performance: A Panel Study Of Quoted Firms In Nigeria," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 8(1), pages 94-106.
    2. Hallman, Nicholas J. & Kartapanis, Antonis & Schmidt, Jaime J., 2022. "How do auditors respond to competition? Evidence from the bidding process," Journal of Accounting and Economics, Elsevier, vol. 73(2).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    2. Knechel, W. Robert & Thomas, Edward & Driskill, Matthew, 2020. "Understanding financial auditing from a service perspective," Accounting, Organizations and Society, Elsevier, vol. 81(C).
    3. Breuer, Matthias & Le, Anthony & Vetter, Felix, 2023. "Audit mandates, audit firms, and auditors," Working Papers 333, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    4. Lin, Hsiao-Lun & Yen, Ai-Ru, 2017. "Determinants and market valuation of the decision to audit or review: Evidence from Taiwan," Journal of Contemporary Accounting and Economics, Elsevier, vol. 13(3), pages 209-224.
    5. Petro Lisowsky & Michael Minnis, 2020. "The Silent Majority: Private U.S. Firms and Financial Reporting Choices," Journal of Accounting Research, Wiley Blackwell, vol. 58(3), pages 547-588, June.
    6. Asif M. Huq & Fredrik Hartwig & Niklas Rudholm, 2022. "Do audited firms have a lower cost of debt?," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 19(2), pages 153-175, June.
    7. Chen, Long & Krishnan, Gopal V. & Yu, Wei, 2018. "The relation between audit fee cuts during the global financial crisis and earnings quality and audit quality," Advances in accounting, Elsevier, vol. 43(C), pages 14-31.
    8. Kausar, Asad & Shroff, Nemit & White, Hal, 2016. "Real effects of the audit choice," Journal of Accounting and Economics, Elsevier, vol. 62(1), pages 157-181.
    9. Ray Ball, 2009. "Market and Political/Regulatory Perspectives on the Recent Accounting Scandals," Journal of Accounting Research, Wiley Blackwell, vol. 47(2), pages 277-323, May.
    10. Kothari, S.P. & Ramanna, Karthik & Skinner, Douglas J., 2010. "Implications for GAAP from an analysis of positive research in accounting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 246-286, December.
    11. Clatworthy, Mark A. & Peel, Michael J., 2016. "The timeliness of UK private company financial reporting: Regulatory and economic influences," The British Accounting Review, Elsevier, vol. 48(3), pages 297-315.
    12. Rustam, Sehrish & Rashid, Kashif & Zaman, Khalid, 2013. "The relationship between audit committees, compensation incentives and corporate audit fees in Pakistan," Economic Modelling, Elsevier, vol. 31(C), pages 697-716.
    13. Dang, Man & Puwanenthiren, Premkanth & Truong, Cameron & Henry, Darren & Vo, Xuan Vinh, 2022. "Audit quality and seasoned equity offerings methods," International Review of Financial Analysis, Elsevier, vol. 83(C).
    14. Huq, Asif & Hartwig, Fredrik & Rudholm, Niklas, 2018. "Do audited firms have lower cost of debt?," HUI Working Papers 132, HUI Research.
    15. Jere R. Francis & Wei Wang, 2021. "Common Auditors and Private Bank Loans," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 793-832, March.
    16. Palazuelos Cobo, Estefanía & Montoya del Corte, Javier & Herrero Crespo, Ángel, 2017. "Determinantes de la continuidad en la contratación de la auditoría de forma voluntaria: evidencia para el caso de España," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 20(1), pages 63-72.
    17. Pinghsun Huang & Yi-Chieh Wen & Yan Zhang, 2020. "Does the monitoring effect of Big 4 audit firms really prevail? Evidence from managerial expropriation of cash assets," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 739-768, August.
    18. Habib, Ahsan, 2011. "Audit firm industry specialization and audit outcomes: Insights from academic literature," Research in Accounting Regulation, Elsevier, vol. 23(2), pages 114-129.
    19. Kajüter, Peter & Klassmann, Florian & Nienhaus, Martin, 2016. "Do Reviews by External Auditors Improve the Information Content of Interim Financial Statements?," The International Journal of Accounting, Elsevier, vol. 51(1), pages 23-50.
    20. Sarhan, Ahmed A. & Ntim, Collins G. & Al-Najjar, Basil, 2019. "Antecedents of audit quality in MENA countries: The effect of firm- and country-level governance quality," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 35(C), pages 85-107.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:abacus:v:54:y:2018:i:3:p:319-352. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0001-3072 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.