Willekens_2008 - The effects of external auditing in...

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1 The effects of external auditing in privately held companies: Empirical evidence from Belgium Marleen Willekens Professor of Auditing at Tilburg University and KU Leuven
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2 1. I NTRODUCTION 2. H YPOTHESES 2.1. Earnings management hypotheses 2.2. Tax regularization disclosure hypotheses 2.3. Financial performance hypotheses 2.4. Cost of financial debt hypotheses 3. M ODEL SPECIFICATION 3.1. Earnings management model 3.2. Tax regularization disclosure model 3.3. Overall financial performance model 3.4. Cost of financial debt model 4. D ATA COLLECTION AND SAMPLES 5. R ESULTS 5.1. Earnings management regression results 5.2. Tax regularization disclosure results 5.3. Overall financial performance results 5.4. Cost of financial debt results 6. C ONCLUSIONS
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3 1. I NTRODUCTION The objective of this study is twofold: First, to investigate the effects of financial statements auditing on financial reporting and other characteristics of privately held firms. Second, to examine the impact of audit intensity (quantity) on financial reporting and other characteristics of privately held firms. Investigating the effects of external financial statements auditing for privately held firms in a continental European setting is relevant for a number of reasons. One important reason is the current European debate about deregulation of demand for financial statement auditing for privately held firms. Most prior studies that examine the effects of auditing are performed on samples of publicly held firms in Anglo-Saxon environments and examine the effect of audit product differentiation on certain client characteristics. Typical effects that are examined include earnings management decreases and earnings restatements. To our knowledge there are no studies that investigate the effect of auditing itself on client characteristics in a privately held firm context. In addition, there are also no studies that investigate the effects of the intensity of audit demand on client-firm characteristics. This study attempts to address this caveat. In this study four sets of hypotheses about the impact of external financial statements auditing on privately held firm characteristics are examined. These hypotheses are based on economic theory about the role of auditing (W ALLACE , 1980). The economic role of auditing relates to: 1) a reduction of agency costs that typically exist in the absence of financial statements monitoring; 2) a reduction of information asymmetry between management (or, owner-managers) and stakeholders; and 3) a reduction of various stakeholder risks and externalities.
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4 The first two hypotheses that are tested relate to effects on two measures of financial reporting quality that are of relevance to various stakeholders in a continental European (i.e. Belgian) setting: (i) the degree of earnings management through abnormal accruals, and (ii) the
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This note was uploaded on 10/27/2008 for the course TE 17832 taught by Professor Will during the Spring '08 term at American College of Gastroenterology.

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Willekens_2008 - The effects of external auditing in...

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