Cost of debt capital and audit in Spanish SMEs

Abstract

Evidence about the effect of voluntary audits on the cost of debt is mixed, and there is no research about the effects of mandatory audits and the non-compliance with the audit requirement. Using a sample of Spanish SMEs, where some companies are exempt from audit and some are mandatorily audited, we examine if audits, either mandatory or voluntary, help to reduce the cost of debt. We do not find a significant association between voluntary audits and cost of debt, whereas companies that breach the audit requirement have a higher cost of debt than the mandatorily audited ones. This suggests that differences in the cost of debt between audited and unaudited companies are associated with a "punishment" for companies that shun the mandatory audit rather than a "reward" for voluntarily audited companies. Moreover, within audited SMEs, we do not find that those audited by large auditors have a lower cost of debt.La evidencia sobre la relación entre el coste financiero y la auditoría voluntaria es mixta, y no existe literatura empírica sobre los efectos del no cumplimiento con la auditoría obligatoria. Con una muestra de pymes españolas, una parte de las cuales está obligada a auditarse y otra está exenta, examinamos si la auditoría, tanto obligatoria como voluntaria, ayuda a la reducción del coste financiero. No encontramos una relación significativa entre la auditoría voluntaria y el coste financiero, mientras que las pymes que incumplen con el requisito de auditarse tienen un coste financiero mayor que las auditadas obligatoriamente. Ello sugiere que las diferencias en el coste financiero entre pymes auditadas y sin auditar están asociadas a un "castigo" para aquellas que evitan la auditoría obligatoria, en lugar de a una "recompensa" para las auditadas de modo voluntario. Entre las pymes auditadas, no encontramos que las auditadas por grandes auditores tengan un menor coste financiero.

Audit fees and cost of debt: differences in the credibility of voluntary and mandatory audits

“…Nevertheless, other papers have not found a significant association between voluntary audits and the cost of debt (Allee & Yohn, 2009;Cassar, Ittner, & Cavalluzzo, 2015;Huguet & Gand ıa, 2014). While Allee and Yohn (2009) and Cassar et al (2015) do not find that voluntary audits have a significant effect on the cost of debt, Huguet and Gand ıa (2014) only find a significant effect when companies are mandatorily audited, suggesting an asymmetric effect of audit on the cost of debt.…”

“…We have to note that these studies examine voluntary audits on the SMEs setting. In these companies, the usefulness of accounting information is not clear, because lenders rely more on other information sources (Berger & Udell, 2006;Gill de Albornoz Noguer & Illueca, 2007;Huguet & Gand ıa, 2014). Furthermore, lenders may perceive that voluntary audits are not credible.…”

“…Despite the extensive research about audit fees, there are few studies that have examined the effect of audit fees on the credibility of accounting information and on the cost of debt, and the evidence is mixed (Dhaliwal, Gleason, Heitzman, & Melendrez, 2008;Jiang & Zhou, 2017). Furthermore, in spite of the assumed idea that audits help to enhance the credibility of accounting information, the empirical evidence on the association between voluntary audits and the cost of debt is mixed (Huguet & Gand ıa, 2014;Lennox & Pittman, 2011). We consider that the credibility of voluntary audits may depend on the audit fees paid by the auditee.…”

Review of Empirical Literature on Audit Quality and Cost of Debt Capital

“…Additionally, the link between auditor quality and age was reliant upon the industry, with the advantages of employing auditors of high quality mainly accrued to younger technology companies and older non-technology companies. Huguet and Gandía(2012) investigated the link between the costs of debt capital and auditing within the SME framework, a subject not studied much in previous literature and that yielded contradictory results. They used Spanish SMEs as the sample for the study, which contained audited firms, with voluntary and mandatory audits, and non-audited firms.…”

External investigations and disciplinary sanctions against auditors: the impact on audit quality

“…Aguiar-Díaz and Díaz-Díaz (2015) identify differences in auditor behavior that are linked to client size: Big 4 and Second-Tier firms provide higher audit quality when they audit large client companies, whereas Second-Tier firms provide lower audit quality for their smaller clients. Huguet and Gandía (2014) also demonstrate that those smaller auditees that avoid the audit requirements face higher costs of debt than do client companies that undergo a compulsory audit. Additionally, voluntary audits have no effect on the cost of the debt.…”