The Intersection of Family Business and Audit Research: Potential Opportunities

Abstract

Previous research has illustrated the importance of family businesses and significant differences between family and nonfamily businesses. Such differences will likely affect auditing for family versus nonfamily businesses. The authors emphasize experimental research labeled as “audit judgment and decision making research.” They argue that some aspects of people, tasks, and environment are different between family and nonfamily businesses and that these differences affect auditor judgments. A range of theoretical frameworks applicable to auditing research related to family businesses are considered. The authors suggest potential research opportunities related to auditor judgments, auditor—client negotiations, the demand for auditing, audit quality, corporate governance, and internal audit.

Family Ownership, Auditor Choice and Audit Fees: Evidence from Hong Kong

“…First, we examine how family control influences the firm's decision in auditor choice and audit fees simultaneously incorporating corporate governance variables within the context of emerging economies where relatively few literatures are found (Lin & Liu, 2009;Trotman & Trotman, 2010). Given the different effect of agency problems among family firms, overall models for the analyses of auditor choice and audit fees may be substantially biased if we ignore the effect of family influence.…”

Founding family and auditor choice: Evidence from Taiwan

“…Taken altogether, firms with family ownership ( FOWN ), founder CEOs ( FF_CEO ), professional CEOs ( FH_CEO ), and cash–vote divergence ( FDIV ) are unanimously disinclined to appoint higher‐quality auditors, despite the fact that these family ownership and control mechanisms feature two distinct agency effects (i.e., the alignment effect and the entrenchment effect). As argued earlier, family owners and outside investors have opposing demands for auditor quality (Dao et al, ; Trotman & Trotman, ). Our findings reflect the net effects of these two sources of demands for auditor quality based on different agency scenarios, and imply that the outcome of auditor choice within family firms is determined in different ways.…”

“…Auditor choice is one of the most important decisions a firm has to make, and has significant implications for financial reporting quality and transparency. Despite abundant research on auditor choice, it remains an under‐researched issue in family firms (Ho & Kang, ; Trotman & Trotman, ). Drawing from agency perspectives, this study emphasizes distinctive agency effects arising from family ownership, cash–vote divergence, CEO identity, and the impact of family ownership and control features on auditor choice.…”

“…It has been suggested that monitoring by higher‐quality auditors can reduce insiders' incentives and ability to render financial statements less informative, thereby alleviating the problem of agency conflict between insiders and outsiders by mitigating information asymmetry (e.g., Becker, DeFond, & Jiambalvo, ). However, to date, few studies have examined auditing issues in family firms (Ho & Kang, ; Trotman & Trotman, ). This study adds to the existing literature by investigating whether family ownership and control configurations are systematically associated with a firm's choice of auditor.…”

“…Both family owners and outside investors operationally have a voice in relation to auditing matters (Dao, Raghunandan, & Rama, ; Trotman & Trotman, ). We argue that a family firm's auditor choice is a consequence of a tradeoff between the family owners' intrinsic alignment or entrenchment incentive for supplying credible accounting information, and the outside investors' corresponding demand for such information.…”