Does opting out from auditing decrease earnings quality and/or increase tax aggressiveness? An analysis of small companies from Norway.

Abstract

Following a new legislation in Norway from 2011, smaller unlisted Norwegian companies now have an opportunity to opt out from auditing. We hypothesize that this has led to a decrease in earnings quality and an increase in tax aggressiveness for these opt out firms. A large Norwegian private limited liability company data sample rejects our hypotheses and indicate better quality earnings and less tax aggressiveness amongst opt out firms. Earnings quality is operationalized using an OLS and a fixed effects research design using regressions on discretionary accruals and discretionary revenues, while tax aggressiveness is operationalized in the same way, using the Cash Effective Tax Rate (CETR) and Book-Tax-Difference (BTD). The results increase understanding of side-effects from this new legislation and provide insights into the economics and accounting standards in a Norwegian setting. Further, our paper adds to the understanding of auditor effects on private companies, a scarcely researched field, possibly due to difficulty in obtaining data in some countries. We would like to sincerely thank our supervisor, John Christian Langli, for lending us his expertise and guidance in writing our Master Thesis. There are plausibly no better expert in this field of study that we could have conferred with. We have enjoyed him lecturing us, respected his warranted strictness and we hope to do him proud.