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Agency conflicts and auditing in private firms

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  • Hope, Ole-Kristian
  • Langli, John Christian
  • Thomas, Wayne B.

Abstract

We are interested in understanding how agency conflicts in private firms arise through ownership structures and family relationships. Specifically, we analyze auditors’ increase of effort and firms’ choice of auditors in situations with higher level of agency conflicts. For a large sample of private firms, we use unique and confidential data (obtained through special permission by the government) to measure direct and ultimate ownership for each shareholder as well as extended family relationships (based on marriage and blood lines, going back four generations and extending out to fourth cousin) among all shareholders, board members, and CEOs. We first find that audit fees, our proxy for audit effort, vary as hypothesized with firm-level characteristics related to ownership structures and family relationships. Second, we find evidence that firms in higher agency cost settings respond by having their financial statements audited by a higher-quality auditor (i.e., a Big 4 firm). However, for CEO family-related settings (i.e., where the CEO is related to the major shareholder or as the number of board members related to the CEO increases), we find no evidence of a greater demand for a Big 4 auditor.

Suggested Citation

  • Hope, Ole-Kristian & Langli, John Christian & Thomas, Wayne B., 2012. "Agency conflicts and auditing in private firms," Accounting, Organizations and Society, Elsevier, vol. 37(7), pages 500-517.
  • Handle: RePEc:eee:aosoci:v:37:y:2012:i:7:p:500-517
    DOI: 10.1016/j.aos.2012.06.002
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    Cited by:

    1. Wouter Dutillieux & Donald Stokes & Marleen Willekens & Gary Monroe, 2013. "Strategic pricing by Big 4 audit firms in private client segments," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(4), pages 961-994, December.
    2. repec:spr:reaccs:v:22:y:2017:i:2:d:10.1007_s11142-017-9394-2 is not listed on IDEAS
    3. Santiago Lago-Peñas & Mercedes Mareque Álvarez-Santullano & Elena Rivo-López & Mónica Villanueva-Villar, 2017. "Determining factors for audit opinion in private family and non-family firms. Evidence from Spain," Working Papers. Collection C: Family business 1701, Universidade de Vigo, GEN - Governance and Economics research Network.
    4. Chiraz Ben Ali, 2014. "Corporate Governance, Principal-Principal Agency Conflicts, and Disclosure," Working Papers 2014-125, Department of Research, Ipag Business School.
    5. Chiraz Ben Ali & Cédric Lesage, 2014. "Audit Fees in Family Firms: Evidence From U.S. Listed Companies," Working Papers 2014-43, Department of Research, Ipag Business School.
    6. repec:ipg:wpaper:2014-417 is not listed on IDEAS
    7. repec:spr:reaccs:v:22:y:2017:i:4:d:10.1007_s11142-017-9429-8 is not listed on IDEAS
    8. Corten, Maarten & Steijvers, Tensie & Lybaert, Nadine, 2017. "The effect of intrafamily agency conflicts on audit demand in private family firms: The moderating role of the board of directors," Journal of Family Business Strategy, Elsevier, vol. 8(1), pages 13-28.
    9. repec:ipg:wpaper:2014-043 is not listed on IDEAS
    10. Huq, Asif & Hartwig, Fredrik & Rudholm, Niklas, 2018. "Do audited firms have lower cost of debt?," HUI Working Papers 132, HUI Research.

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