Determinants of Auditor Choice: Evidence from a Small Client Market

Abstract

This paper analyzes the auditor choices for a sample of 2,333 predominantly small and mid-sized Finnish firms. Finland requires virtually all commercial enterprises to have a financial statement audit, but allows the smallest firms to choose from four types of audit firms: first tier international firms, first tier national firms, second tier local auditors and non-certified auditors. We find that among the smallest firms, the choice to hire a certified auditor relates to the level of complexity in the organization as measured by size and extent of workforce. For firms that must use a certified auditor, we find that the choice between a first tier and second tier firm is related to size, the extent of debt financing, and complexity associated with being a member of an associated group. Finally, in the upper end of the market, the decision to hire a large international firm relates to size, the need for financing, be it equity or debt, and complexity due to a broad labour force. This pattern is interesting because it indicates that the need for a higher quality auditor is driven first by complexity, then as the firm grows, it is supplemented by the use of debt financing and ultimately by the need to raise equity as well as debt financing.

Audit‐firm group appointment: an artificial intelligence approach

“…DT, NNs and logistic regression, all agree that the most signifi cant input variable is the variable Total Debt, and Audit Fees is also included in the list of signifi cant variables. This conclusion complies with the fi ndings of DeFond (1992); Firth (2002); Broye and Weill (2008) and Knechel et al (2008). …”

“…A recent study by Knechel et al (2008) analysed auditor nomination by Finnish fi rms using logistic regression analysis. They found that the need for a higher quality auditor is fi rst driven by complexity, and then, as the fi rm grows, it is supplemented by the use of debt fi nancing and ultimately by the need to raise equity as well as debt fi nancing.…”

“…Studies conducted both in the past and also quite recently associate debt with auditor engagement (DeFond, 1992;Knechel et al, 2008;Broye and Weil, 2008). The debt-related variables Long Term Debt, Total Debt and Gearing were tested.…”

Audit Quality: The Role of Board Structure in Family Firms

“…One of the reasons behind this argument is that in Finland virtually all businesses regardless of size are required to report public financial statements that are subject to full financial statement audit (Knechel, Niemi, & Sundgren, 2008).…”

“…Following previous studies, we include a set of control variables for different aspects of audit complexity, which can have an impact on firm's demand for audit quality. To control for organizational complexity we define the variable SIZE as a natural logarithm of total assets, and the variable GROUP, indicating whether the firm belongs to a corporate group (i.e., the firm is a parent company, a subsidiary or a jointly controlled company) (Knechel et al, 2008). To control for the transactions complexity, we define the variable A_TURN as a ratio of sales to total assets, and the variable EXPORT, indicating whether the firm has foreign sales (Chaney et al, 2004).…”