Agency Conflicts and Auditing in Private Firms

51 Pages Posted: 12 Sep 2010 Last revised: 8 Jun 2012

Ole-Kristian Hope

University of Toronto - Rotman School of Management

John Christian Langli

BI Norwegian Business School - Department of Accounting, Auditing and Business Analytics

Wayne B. Thomas

University of Oklahoma - Michael F. Price College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 7, 2012

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 (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.

Keywords: Agency conflicts, auditing, private firms, family relationships, ownership, audit effort, audit demand

JEL Classification: G30, G33, M41

Suggested Citation

Hope, Ole-Kristian and Langli, John Christian and Thomas, Wayne B., Agency Conflicts and Auditing in Private Firms (June 7, 2012). Available at SSRN: https://ssrn.com/abstract=1675934 or http://dx.doi.org/10.2139/ssrn.1675934

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

John Christian Langli

BI Norwegian Business School - Department of Accounting, Auditing and Business Analytics ( email )

N-0442 Oslo
Norway

Wayne B. Thomas

University of Oklahoma - Michael F. Price College of Business ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

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