Agency Conflicts and Auditing in Private Firms
University of Toronto - Rotman School of Management
John Christian Langli
BI Norwegian Business School - Department of Accounting, Auditing and Law
Wayne B. Thomas
University of Oklahoma - Michael F. Price College of Business
June 7, 2012
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 (obtain 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 firm-level 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.
Number of Pages in PDF File: 51
Keywords: Agency conflicts, auditing, private firms, family relationships, ownership, audit effort, audit demand
JEL Classification: G30, G33, M41
Date posted: September 12, 2010 ; Last revised: June 8, 2012
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