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Auditor choices and auditor reporting practices: evidence from Finnish small firms

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  • Stefan Sundgren

Abstract

This paper examines the links between the likelihood of a modified audit report and the professional qualifications of the auditor for a sample of small and medium-sized firms. Like Denmark, Germany and Sweden, Finland has a two-tier system for qualifications. The data show that modified audit reports are more common in unprofitable, leveraged and failing firms, but there are no significant differences in the propensity to modify the report between auditors with the higher and lower professional qualification. However, it is found that non-professional auditors, i.e. auditors assumed to meet only general eligibility criteria specified by law, are less likely to modify the report. Finnish auditing laws stipulate that all companies must be audited. However, the company must be audited by a professional auditor only if the business exceeds a certain size. Therefore the paper continues with a study of factors related to the decision to engage a professional auditor, although the law does not require firms to do so. Results show that failing firms are significantly less likely to be audited by professional auditors than non-failing firms.

Suggested Citation

  • Stefan Sundgren, 1998. "Auditor choices and auditor reporting practices: evidence from Finnish small firms," European Accounting Review, Taylor & Francis Journals, vol. 7(3), pages 441-465.
  • Handle: RePEc:taf:euract:v:7:y:1998:i:3:p:441-465
    DOI: 10.1080/096381898336376
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    References listed on IDEAS

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    1. John Margerison & Peter Moizer, 1996. "Auditor licensing in the European Union: a comparative study based on cultural differences," European Accounting Review, Taylor & Francis Journals, vol. 5(1), pages 29-56.
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    5. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    6. Francis, Jere R., 1984. "The effect of audit firm size on audit prices : A study of the Australian Market," Journal of Accounting and Economics, Elsevier, vol. 6(2), pages 133-151, August.
    7. Eisenberg, Theodore & Sundgren, Stefan & Wells, Martin T., 1998. "Larger board size and decreasing firm value in small firms," Journal of Financial Economics, Elsevier, vol. 48(1), pages 35-54, April.
    8. Daron Acemoglu & Miles Gietzmann, 1998. "Auditor independence, incomplete contracts and the role of legal liability," European Accounting Review, Taylor & Francis Journals, vol. 6(3), pages 355-375.
    9. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
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    1. repec:eee:spacre:v:15:y:2012:i:2:p:287-310 is not listed on IDEAS
    2. Jyrki Niskanen & Jukka Karjalainen & Mervi Niskanen & Jussi Karjalainen, 2011. "Auditor gender and corporate earnings management behavior in private Finnish firms," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(9), pages 778-793, October.
    3. Hyytinen, Ari & Väänänen, Lotta, 2004. "Mandatory Auditor Choice and Small Finance: Evidence from Finland," Discussion Papers 950, The Research Institute of the Finnish Economy.
    4. Arber H. Hoti & Hysen Ismajli & Skender Ahmeti & Arben Dermaku, 2012. "Effects of Audit Opinion on Stock Prices: The case of Croatia and Slovenia," EuroEconomica, Danubius University of Galati, issue 2(31), pages 75-87, May.

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