Are family firms less audit-risky? Analysing audit fees, hours and rates

Abstract

We examine differences in audit scope between publicly-listed family and non-family firms in Israel, using a unique dataset that includes external and internal audit hours, audit fees and billing rates. We find that external auditors charge lower average hourly rates for family firms than for non-family firms. However, audit effort, measured as the number of audit hours, is lower in family firms than in non-family firms, but the difference is not statistically significant. Moreover, the number of internal audit hours is smaller, on average, in family firms than in non-family firms. Our findings suggest family ownership affects audit mainly when the family is actively involved in the firm's management. We also examine a subsample of eponymous family firms and obtain similar results. Analysis of a sub-sample of firms that switched from family to non-family status or vice-versa shows that audit fees and hourly rates decrease (increase) when a firm changes its status from non-family (family) to family (non-family) status. Lastly, we find that the reporting quality of family firms is higher than that of non-family firms. Overall, our results suggest that auditors perceive family firms to be less audit-risky.