Voluntary Audits Versus Mandatory Audits

The Accounting Review, Forthcoming

Posted: 28 Aug 2011

See all articles by Clive S. Lennox

Clive S. Lennox

University of Southern California

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Date Written: August 26, 2011

Abstract

Exploiting a natural experiment in which voluntary audits replace mandatory audits for U.K. private companies, we analyze whether imposing audits suppresses valuable information about the types of companies that would voluntarily choose to be audited. We control for the assurance benefits of auditing to isolate the role signaling plays by focusing on companies that are audited under both regimes. These companies experience no change in audit assurance, although they can now reveal for the first time their desire to be audited. We find that these companies attract upgrades to their credit ratings because they send a positive signal by submitting to an audit when this is no longer legally required. In contrast, companies that dispense with being audited suffer downgrades to their ratings because avoiding an audit sends a negative signal and removes its assurance value.

Keywords: voluntary audits, mandatory audits, credit ratings

JEL Classification: M4

Suggested Citation

Lennox, Clive and Pittman, Jeffrey A., Voluntary Audits Versus Mandatory Audits (August 26, 2011). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1917852

Clive Lennox (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

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