Ownership concentration, foreign ownership and auditing: evidence from SMEs in Latin America

Abstract

PurposeThis paper aims to investigate the impact of ownership concentration of the largest shareholder and foreign ownership on the demand for an external audit for small and medium-sized enterprises (SMEs) in six Latin American countries. In particular, the authors test whether foreign-owned firms (compared with domestic private-owned firms) and domestic firms with minority foreign shareholders are more likely engaged in audit assurance.Design/methodology/approachThe authors applied the logit model to estimate the impact of ownership concentration and owner/shareholder type on audit demand, using a sample of 4,609 SMEs. The probabilities of being audited for firms in these countries are then calculated from the estimation results.FindingsThe empirical results suggest an inverse relationship between ownership concentration and audit demand only for Uruguay and Peru. However, foreign-owned firms and domestic private-owned firms with minority foreign ownership have a high probability of being audited for all sample countries.Research limitations/implicationsPolicymakers in developing countries may promote foreign investments in domestic private-owned firms to improve their corporate transparency and governance.Originality/valueThis study contributes to the growing literature on the impact of ownership on audit demand by particularly focusing on foreign owners and foreign minority shareholders. The findings indicate that foreign ownership (either majority or minority) contributes to corporate transparency and business environments in emerging countries.