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Agency conflicts and auditing in private firms

Hope, Ole-Kristian; Langli, John Christian; Thomas, Wayne B.
Journal article, Peer reviewed
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URI
http://hdl.handle.net/11250/93674
Date
2012
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Original version
http://dx.doi.org/10.1016/j.aos.2012.06.002
Abstract
We are interested in understanding how agency conflicts in private firms arise through

ownership structures and family relationships. Specifically, we analyze auditors’ increase of

effort and firms’ choice of auditors in situations with higher level of agency conflicts. For a large

sample of private firms, we use unique and confidential data (obtained through special

permission by the government) to measure direct and ultimate ownership for each shareholder as well as extended family relationships (based on marriage and blood lines, going back four generations and extending out to fourth cousin) among all shareholders, board members, and CEOs. We first find that audit fees, our proxy for audit effort, vary as hypothesized with firmlevel

characteristics related to ownership structures and family relationships. Second, we find

evidence that firms in higher agency cost settings respond by having their financial statements audited by a higher-quality auditor (i.e., a Big 4 firm). However, for CEO family-related settings (i.e., where the CEO is related to the major shareholder or as the number of board members related to the CEO increases), we find no evidence of a greater demand for a Big 4 auditor.
Description
This is the authors’ final, accepted and refereed manuscript to the article
Publisher
Elsevier
Journal
Accounting, Organizations and Society

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