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

  • Stefan Sundgren
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    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.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/096381898336376
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    Article provided by Taylor & Francis Journals in its journal European Accounting Review.

    Volume (Year): 7 (1998)
    Issue (Month): 3 ()
    Pages: 441-465

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    Handle: RePEc:taf:euract:v:7:y:1998:i:3:p:441-465
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    1. Mitchell A. Petersen & Raghuram G. Rajan, 1996. "Trade Credit: Theories and Evidence," NBER Working Papers 5602, National Bureau of Economic Research, Inc.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. Leeth, John D. & Scott, Jonathan A., 1989. "The Incidence of Secured Debt: Evidence from the Small Business Community," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 379-394, September.
    7. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    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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