While the value of external audits was long considered to be minimal for private family firms, some exceptional studies indicate that external audits are demanded by these firms to reduce the agency conflicts between family and non-family members. Using a sample of Belgian private family firms, this study empirically shows that (high quality) auditors are also hired to mitigate agency conflicts among family members. Since these intrafamily conflicts are mainly based on emotions instead of economically rational behavior and are therefore difficult to grasp by compositional proxies, they are identified by the level of family cohesion. Moreover, this study shows that the monitoring effectiveness of the board of directors weakens the association between the level of intrafamily agency conflicts and audit (quality) demand, indicating that the audit demand effect of intrafamily agency conflicts decreases when family firms are able to reduce the related agency costs internally.
Former audit demand studies generally consider wholly family-owned private firms as a homogeneous group of firms that incur minimal agency costs. Family firm literature, however, argues that these firms might incur significant agency costs as well and we therefore examine audit demand in this particular type of firms. As we examine private family firms from the US, which have no audit requirement, we broaden the concept of audit demand to the demand for auditor services, which encompasses audits, reviews and compilations. Consistent with former audit demand studies, we hypothesise a negative association between management ownership and the demand for auditor services but only for first generation private family firms. We hypothesise that this relation turns positive for subsequent generation private family firms due to entrenching behaviour caused by weakened altruistic feelings between the family shareholders. Our results support this hypothesis but only regarding the demand for reviews and compilations. Therefore, our findings suggest that reviews and compilations seem to be sufficient and more cost-effective in this specific context to mitigate shareholder-manager agency costs compared to more expensive audits.Moreover, results suggest that the level of shareholder-debtholder agency costs do seem to be a driver for the demand for audits.
Audit demand is generally considered to be a direct reflection of the level of agency conflicts. This study examines the CEO's value perception towards auditing as additional driver for both auditor reputation demand (appointing a Big 4 auditor or not) and audit effort demand in private firms. Examining the CEO's value perception in a multidimensional way, the regression results indicate that the CEO's functional value perception towards auditing positively affects the demand for audit effort, while the CEO's social value perception towards auditing negatively affects the demand for audit effort but positively affects the demand for auditor reputation.
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