Deregulation of the Private Corporation Audit in Canada: Justification, Lobbying, and Outcomes

Rennie, Morina; Senkow, David; Rennie, Richard D.; Wong, Jonathan

doi:10.1016/s1052-0457(02)16014-0

Cited by 19 publications

(19 citation statements)

References 4 publications

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“…Canadian researchers, seeking to understand the voluntary audit decision, have therefore employed survey methods rather than archival financial statement data. Rennie et al (2003) used a postal questionnaire to obtain data from 204 CFOs of newly exempt Canadian private companies. In the first year of exemption, 73% of sample companies reported that they had retained the audit.…”

Section: Prior Literature and Hypothesis Developmentmentioning

confidence: 99%

“…Small UK companies have relatively high failure rates (Urwin et al, 2008) and so suppliers are likely to value any reassurance that they will be paid. Such assurance to users has been found to be an important determinant of the demand for voluntary audit (Rennie et al, 2003), in which case we would expect high levels of inventory and receivables to have a positive influence on demand. However, Simunic (1980) points out that these 'risky balance sheet components' are difficult to audit, requiring observation and confirmation, and that they increase the auditor's liability exposure.…”

Section: Prior Literature and Hypothesis Developmentmentioning

confidence: 99%

“…The public good element of the service is one of the justifications employed by the many regulators that mandate audits as a condition of stock exchange listing. It is argued that, absent regulation, there may be under-provision of audit resulting in a social loss (Rennie et al, 2003;Lennox and Pittman, 2011). 1 However, large-scale evidence on the incentives to voluntarily purchase an audit has hitherto been unavailable.…”

Section: Introductionmentioning

confidence: 99%

“…Previous researchers in the area, struggling to identify suitable experimental settings, have been forced to innovate with respect to their samples, for example, using historical data from the preSecurities and Exchange Commission period for US companies (Chow, 1982), or not-for-profit organisations (Hay and Davis, 2004). Scant archival data from the financial statements has also imposed limits on the number of explanatory variables included in the analysis, or forced researchers into conducting surveys (Carey et al, 2000;Senkow et al, 2001;Seow, 2001;Rennie et al, 2003;Collis et al, 2004). The sample sizes in these prior studies are therefore somewhat limited.…”

Section: Introductionmentioning

confidence: 99%

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The Demand for Audit in Private Firms: Recent Large-Sample Evidence from the UK

Dedman

Kausar

Lennox

2013

European Accounting Review

113

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Although theory suggests that companies would rationally select into audit even if it were not a legal requirement, many countries impose mandatory audits. This is arguably due to an audit having elements of a public good, which may result in not enough audits being purchased without regulatory intervention. The mandatory nature of public company audit has created problems for researchers wishing to investigate the demand for voluntary audit. Recent events in the UK, however, have provided such an environment. In the UK, private companies must publicly file financial statements and, until recently, they had also to be audited. However, this requirement has now been relaxed for many private companies. We are therefore able to examine the determinants of voluntary audit in a large sample of companies for which we have financial statement data. We analyse a sample of 6274 recently exempt companies, following them for three years post-exemption. We use agency theory and prior evidence to generate our hypotheses and examine them using a more comprehensive set of explanatory variables than has previously been available in the literature. Our results indicate that companies are more likely to purchase voluntary audits if they have greater agency costs, are riskier, wish to raise capital, purchase non-audit services from their auditor, and exhibited greater demand for audit assurance in the mandatory audit regime. We also document a trend away from audit over time. Overall, our results strongly support the idea that companies choose to be audited when it is in their interests to do so.

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Section: Prior Literature and Hypothesis Developmentmentioning

confidence: 99%

Section: Prior Literature and Hypothesis Developmentmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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The Demand for Audit in Private Firms: Recent Large-Sample Evidence from the UK

Dedman

Kausar

Lennox

2013

European Accounting Review

113

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“…As for private companies, (Collis 2010;Collis et al 2004;Seow 2001;Rennie et al 2003) find many small private companies who are exempt from regulatory requirements still opted to have an independent audit.…”

Section: Introductionmentioning

confidence: 99%

The Relationship between an Independent Audit and Financial Reporting Quality: Evidence from Small Private Commercial Banks

Chan

Kogan

2012

SSRN Journal

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The study starts by examining whether the decision to have an independent audit is systematic and endogenous. Private commercial banks with under $500 million in total assets are regulatory exempt from an independent audit requirement.However, approximately 56% of these small private commercial banks voluntarily decided to have an independent audit. Utilizing a set of machine learning algorithms, Ifind that the decision to have an independent audit is systematically determinable and is endogenously determined given a set of bank characteristics. I also find that bank size, profitability, growth, complexity of operations, and type of ownership may influence the decision to have an independent audit at small private commercial banks.In the main part of the study, I analyze whether an independent audit improves financial reporting quality. Financial reporting quality is quantitatively measured by material accuracy, conservative recognition of probable losses, and the magnitude of discretionary accruals. Based on these quantitative measures, I find that having an independent audit does not improve financial reporting quality. More specifically, the iii results in this study indicate that independently audited small private commercial banks had a higher likelihood of having a restatement, were less conservative in recognizing probable loan losses, and had higher magnitudes of discretionary accruals. Collectively, the results in this study provide rigorous and substantial evidence that the quality of financial reporting may not increase by having an independent audit and may not support the benefits of procuring an independent audit absent regulatory requirements.Moreover, the study implicates the quality of audits being performed at small private commercial banks and perhaps suggests that the audit methodology used by external auditors has to be reconsidered.iv ACKNOWLEDGEMENTS

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