Abstract

http://ssrn.com/abstract=1999724
 
 

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The Impact of Voluntary Audit on Credit Ratings: Evidence from UK Private Firms


Elisabeth Dedman


Nottingham University Business School

Asad Kausar


Nanyang Technological University (NTU)

February 5, 2012

Accounting and Business Research, 2012

Abstract:     
After a long period of universal mandatory audit, the UK reduced the regulatory burden of private firms by introducing size-based audit exemption in 1994; the size thresholds have subsequently been progressively increased. Both accounting bodies and credit rating agencies have expressed reservations about this policy, arguing it could diminish user confidence in reported accounting numbers, and lead to a reduction in financial statement quality and credit ratings. Prior research, however, suggests that the managers of small UK companies do not perceive there to be an association between financial statement audit and firm credit score. To provide evidence of any effect on user confidence of making audit optional, we examine the credit scores and financial reporting quality of a large sample of UK private firms which qualified for audit exemption after major threshold changes in 2004. We find that, even though they report lower average profits, companies which retain a voluntary audit enjoy significantly higher credit scores than those which opt out of audit. The results of both conservatism and accruals-based tests indicate that opting out of audit is associated with less conservative financial reporting, consistent with the concerns of the accounting bodies and the credit rating agencies, and providing an explanation for why opt out firms report higher profits but receive lower credit scores. This study contributes to an important policy debate by providing large sample evidence that the audit does confer benefits to private firms in terms of financial reporting quality, assurance, and the credit scores generated from the financial reports.

Number of Pages in PDF File: 37

Keywords: small companies, voluntary audit, credit ratings, financial reporting quality

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Date posted: February 7, 2012  

Suggested Citation

Dedman, Elisabeth and Kausar, Asad, The Impact of Voluntary Audit on Credit Ratings: Evidence from UK Private Firms (February 5, 2012). Accounting and Business Research, 2012. Available at SSRN: http://ssrn.com/abstract=1999724

Contact Information

Elisabeth Dedman (Contact Author)
Nottingham University Business School ( email )
Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom
Asad Kausar
Nanyang Technological University (NTU) ( email )
S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore
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