JEAN LIN-SEOUW IS AN ASSISTANT PROFESSOR in the Nanyang Business School at the Nanyang Technological University, Singapore. There has been considerable debate in recent years concerning the value of the small company audit. This paper aims to explore the impact of the introduction of deregulation of the small company audit in the United Kingdom in 1994. It seeks to identify why small companies may still demand voluntary audits in the absence of a statutory requirement. Theoretical and economic factors and rationales affecting small company management choice to engage auditing are examined. Following a survey sent to small companies qualifying for audit exemption, several hypotheses underlying the demand for audits in an unregulated environment are empirically tested in a logistic regression model. Some support is found for the agency, or stewardship, hypotheses in small company choice to engage auditing.
Get full access to this article
View all access options for this article.
References
1.
Abdel-Khalik, A. R. (1993), 'Why Do Private Companies Demand Auditing? A Case for Organisational Loss of Control' , Journal of Accounting, Auditing and Finance, 8(1), pp 31-52 .
2.
Accountancy (1999a), 'Threshold Hike Hits Small Firms',June, p14-14.
Accountancy (2000), 'Profession Split Over Aidit Threshold', January, p11-11.
5.
Adam, T. (1994), 'The Future of the Small Company Audit', Accountancy, October, p79-79.
6.
Bainbridge, D. R. (1979), 'Unaudited Statements Bankers' and CPA's Perceptions' , CPA Journal (49), December, pp 11-17 .
7.
Bainbridge, D. R., and Paul,J. W. (1995), 'Reliance on the Owner/Manager: Prudent Professional Behaviour?' , The CPA Journal, March, pp 54-57 .
8.
Barker, B. (1985), 'Why Small Businesses Need No Audit' , The Accountant, 30 November, pp'. 4-15 .
9.
Berry, A., Citron, D., and Jarvis, R. (1987), 'The Information Needs of Bankers Dealing with Large and Small Companies', Certified Accountants Publications, London .
10.
Carsberg, B. V., Page, M. J., Sindall, A. J., and Waring, I. D. (1985), 'Small Comnany Financial Reporting', Prentice Hall International, in association with The Institute of Chartered Accountants in England and Wales .
11.
Chisnall, P. (1994), 'Banks and the Small Company Audit', Accountanc, December, pp 76-77.
12.
Chow, C. W. (1982), 'The Demand for External Auditing: Size, Debt and Ownership Influences', Accounting Review, April, pp 272-291.
13.
Crasswell, A. T. (1988), 'The Association Between Qualified Opinions and Auditor Switches' , Accounting and Business Research (19), pp 23-31 .
14.
Craswell, A. T., Francis,J. W., and Taylor, S. L. (1993), 'The Audit Market and Evidence of Both a Brand Name (Big 8) Audit Fee Premium and Returns to Industry Specialisation', Working Paper, Universit of Iowa.
15.
DeAngelo, L. (1982), 'Mandated Successful Efforts and Auditor Choice' , Journal of Accounting and Economics, December, pp 171-203 .
16.
DTI (1999), 'The Statutory Audit Requirement for Smaller Companies DTI A Consultative Document', October, URN 99/115. http://www.dti.gov.uk/cld/condoc/html.
17.
Farrell, P. (1998), 'Practice Profile', Accountancy Ireland, February, pp 16-17.
18.
Frances,J. R., and Simon, D. (1987), 'A Test of Audit Pricing in the SmallClient Segment of the US Audit Market' , The Accounting Review, 62(1), January, pp 145-157 .
19.
Hermanson, R. H., Plunkett, L. M., and Turner, D. H. (1994), 'A Study of the Importance of Certain Attributes to Clients' Initial Selection of Audit Firms: A Longitudinal and Stratified Approach' , Journal of Applied Business Research, 10(1), Winter, pp 101-117 .
20.
Hurst, K. (1994), 'Small Company Audits: The End of the Line', Accountancy, December, pp 140-141.
21.
International Accounting Bulletin (1999), 'Small Firms Fear Sharp Rise in Audit Threshold', May 31, p111-111.
22.
Jensen, M., and Meckling, W. (1976), 'Theory of the Firm: Managerial Behaviour, Agency Costs, and Ownership Structure' , Journal of Financial Economics (3), pp 305-360 .
23.
Keasey, K., Watson, R., and Wynarczyk, P. (1988), 'The Small Company Audit Qualification' , Accounting and Business Research, (18), pp 328-333 .
24.
Kinney, W. R.,Jr., and Martin, R. D. (1994), 'Does Auditing Reduce Bias in Financial Reporting? A Review of Audit-related Adjustment Studies' , Auditing: A Journal of Practice and Theory, 13(1), Spring, pp 149-156 .
25.
Laine, C. (1998), 'Helping Members in Business', Accountany, January, p80-80.
26.
Langard, P. (1999), 'A Damaging Grand Gesture', Accountancy Age, June 24, p27-27.
27.
Masters, S. (1999), 'The Small Company Audit Debate', Accountancy International, August, p78-78.
28.
MORI (1998), 'Small Company Audits', Research Study conducted by MORI for the ACCA, October.
29.
Myers, S. C. (1977), 'Determinants of Corporate Borrowing' , Journal of Financial Economics, November, pp 147-175 .
30.
Pratten, C. (1998), 'The Uses of the Accounts of Small and Medium-sized Companies and the Effects of the Audit Exemption Regime', ICAEW.
31.
Simunic, D., and Stein, M. (1987), 'Product Differentiation in Auditing: A Study of Auditor Effects in the Market for New Issues', The Canadian Certified General Accountants Research Foundation.
32.
Simunic, D. A., and Stein, M. T. (1995), 'The Auditing Marketplace' ,CA Magazine, 128(1),Jan/Feb, pp 53-58 .
33.
Smith, C. W.,Jr., and Warner,J. B. (1979), 'On Financial Contracting: An Analysis of Bond Covenants' , Journal of Financial Economy, June, pp 117-161 .
34.
Statement of Standards for Reporting Accountants: 'Audit Exemption Reports', October 1994, Auditing Practices Board.
35.
Teoh, S. H., and Wong, T.J. (1993), 'Perceived Auditor Quality and the Earnings Response Coefficient' , The Accounting Review, 68(2), April, pp 346-366 .
36.
Wallace, W. A. (1980), 'The Econiomic Role of the Audit in Free and Regulated Markets', Universit of Rochester, New York .
37.
Wills, M. (1999), 'Adding It Up just Right', Accountancy, August, p48-48.
38.
Winter, A. J. (1975), 'Banker Perceptions of Unaudited Financial Statements' , CPA Journal (45), August, pp 29-33 .
39.
Woolf, E. (1994), 'Audit Profitability and Confusing Standards', Accountancy, August, pp 109-110.
40.
Woolf, E. (1994a), 'Auditing Standards: Can Small Firms Comply?', Accountancy, May, pp 84-85.
