The influence of the CEO's value perception towards auditing on audit demand in private firms

Abstract

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.

The Influence of the CEO on Auditor Choice in Private Firms: An Interplay of Willingness and Ability

“…Most empirical studies also support this hypothesis based on agency theory as they find a positive association between agency conflicts and auditor choice (e.g., [2][3][4]14]). As the sample firms in most of these studies already had a statutory audit requirement, auditor choice was generally operationalized as the choice for a Big Four auditor versus a non-Big Four auditor.…”

“…Additionally, in the context of firms having a statutory audit requirement, willingness seems to play an important role as well. In that setting, Corten, Steijvers, and Lybaert [14] found that positive managerial perceptions towards auditing lead to a higher probability of appointing a Big Four auditor. Thus, it seems that if management perceives an audit to be useful, it is more willing to appoint a Big Four auditor.…”

“…The few exceptions that answered the call made by Carcello, Hermanson, and Ye [12] and Cohen, Krishnamoorthy, and Wright [13] therefore examined the private firm context and mainly focused on the willingness of management to influence auditor choice. More specifically, these studies examine the association between management's perception of auditing and auditor choice [14][15][16]. The idea is that management's willingness to demand a voluntary audit or to appoint a Big Four auditor depends on management's perception of auditing (i.e., how useful do I consider external auditing).…”

“…We proxy the CEO's willingness to appoint a non-Big Four auditor based on his/her functional perception towards auditing in line with Collis, Jarvis, and Skerratt [15]; Corten, Steijvers, and Lybaert [14]; and Niemi, Kinnunen, Ojala, and Troberg [16]. We argue that a CEO who perceives an audit as less useful is willing to appoint the least expensive auditor and the one that is perceived to perform the least monitoring and audit work (i.e., a non-Big Four auditor).…”

“…Despite the call of Carcello et al [12] and Cohen et al [13], investigations of the influence of management on auditor choice remain scarce. Moreover, the few exceptions that did answer the call focus solely on the willingness of management to influence auditor choice [14][15][16]. These studies implicitly assume that if management is willing to appoint a (Big Four/non-Big Four) auditor, it is also able to do so.…”