The effects of the auditor's professional qualification and the firm's financial health on depreciation in Finland

Abstract

This study examines the relationship in Finland between the firm's financial health and the depreciation policy for a sample with 1,610 firm-years of data for mainly non-public firms. We find a negative correlation between leverage and depreciation in relation to depreciable assets. This result is consistent with prior studies showing that firms with a higher leverage use income-increasing accounting methods. However, since accounting-based debt covenants are rare among the size class of firms studied, the correlation is likely to be driven by implicit contracting related factors. We also study whether the auditors' professional qualifications correlate with the depreciation policy. The results indicate that Big 5 audited firms depreciate their assets over somewhat shorter periods of time than non-Big 5 audited firms. This result is consistent with the notion that Big 5 auditors are more conservative, perhaps because they have more reputation capital at stake.