Abstract
The purpose of this study is to validate the drivers of voluntary audit in small companies identified in previous research and uncover additional determinants related to agency conflicts with owners. For our research we use the German institutional setting, documented in the literature as being very different from its Anglo‐Saxon equivalent. Based on a random sample of 405 small companies responding to a postal questionnaire survey, we find that the proportion of owners not involved in management, the subsidiary status of a company, a company's legal form, and the importance of financial statements' information to management activities all increase the likelihood of voluntary audit. In contrast, firms that outsource accounting tasks to an external expert are less likely to opt for voluntary audit, suggesting that an external expert's involvement substitutes for an external audit. In addition, owing to the absence of a statutory audit history for small companies in Germany, we find that voluntary audits are less common compared with findings from previous studies.
Highlights
In this study based on small German companies, we examine factors affecting the owner‐manager's decision to hire an auditor
Our results indicate that managers from countries where they have been subject to mandatory audit regimes value the cost and benefits resulting from a voluntary audit very differently from those who have not, demonstrating that the voluntary audit decision is likely to be influenced by previous habits (Niemi, Kinnunen, Ojala, & Troberg, 2012; Oliver, 1991)
By further examining the professional qualifications of those to whom accounting tasks are outsourced, we provide evidence that outsourcing accounting tasks to an external tax advisor decreases the likelihood of a voluntary audit, whereas outsourcing accounting tasks to an external auditor increases the likelihood of a voluntary audit
Summary
In this study based on small German companies, we examine factors affecting the owner‐manager's decision to hire an auditor. A complete absence of owner‐related agency conflicts in small firms is very unlikely (Coppens & Peek, 2005; Page, 1984), which may, reveal a need for audited financial accounting information In line with this argument, previous research analyzing small firms in the UK finds that a voluntary audit is more likely for small companies with shareholders who are not involved in management (Collis, 2010), have a higher number of nondirector shareholders (Seow, 2001), or lower managerial share ownership (Tauringana & Clarke, 2000). We control for industry fixed effects by including binary industry indicators (INDUSTRY_2, INDUSTRY_3, and INDUSTRY_4) for three of the four main industries in our sample
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