The Impact of Voluntary Audits and Governance Characteristics on Accounting Errors in Private Companies

Journal of Accounting and Public Policy, 32(3), pp.1-25, 2013

2012 JAPP/LSE Accounting and Corporate Governance Conference

Posted: 28 Nov 2012 Last revised: 22 Jul 2013

See all articles by Mark Clatworthy

Mark Clatworthy

University of Bristol, Department of Accounting and Finance

Michael J. Peel

Cardiff University - Cardiff Business School

Date Written: November 27, 2012

Abstract

This paper examines the extent to which the audit and corporate governance characteristics of UK private companies are associated with defective accounting information. Despite the economic importance of private firms, relatively little is known about their financial reporting and governance characteristics. Using a large sample of UK private companies, we examine the effects of voluntary audit, board gender balance and financial expertise on the likelihood of errors occurring in published annual accounts. Our results indicate that audited accounts are approximately half as likely as unaudited accounts to contain errors. In addition to contributing to recent academic research in this field, our findings are likely to be of interest to policy makers, who are considering exempting more firms from mandatory audit. We also find that gender diversity among board members is positively associated with accuracy of accounting information, though our primary measure of directors’ financial expertise has no significant effect. Our findings are robust to the employment of two-step endogeneity models, matching and Rosenbaum bounds for confounding variables and rare event logit estimators.

Keywords: accounting errors, voluntary audits, private firms, corporate governance, gender effects, double propensity score matching and Rosenbaum bounds, endogeneity analyses, rare event estimator

JEL Classification: C14, C21, G30, M41, M42, M47

Suggested Citation

Clatworthy, Mark A. and Peel, Michael J., The Impact of Voluntary Audits and Governance Characteristics on Accounting Errors in Private Companies (November 27, 2012). Journal of Accounting and Public Policy, 32(3), pp.1-25, 2013. Available at SSRN: https://ssrn.com/abstract=2181367

Mark A. Clatworthy (Contact Author)

University of Bristol, Department of Accounting and Finance ( email )

School of Economics, Finance and Management
8 Woodland Road
Bristol, BS8 1TN
United Kingdom
+44(0)1173310914 (Phone)

Michael J. Peel

Cardiff University - Cardiff Business School ( email )

Cardiff
United Kingdom

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