Demand for and Assessment of Audit Quality in Private Companies
49 Pages Posted: 10 Aug 2014 Last revised: 9 May 2018
Date Written: April 27, 2018
Audits of financial statements are mandated in most countries thus making it difficult to disentangle features of audit driven by private incentives versus regulation. Who would demand an audit, and how would they assess audit quality in the absence of regulation? Many private companies in Canada get their financial statements audited even though the law does not require it. In this field study, we conduct interviews to learn about various sources of private demand for audits, and criteria used to assess their quality. Our study reveals several sources of private audit demand from both internal stakeholders (management, boards, and employees) as well as external stakeholders (customers, banks and private equity firms). Users assess audit quality based on a variety of criteria such as the auditor’s accounting expertise, absence of errors, fee, risk assessments they make, allocation of their effort, and internal control and general business advice. Implications for audit regulation are discussed.
Keywords: Audit quality, regulation of audits, sources of demand for audits private firms, field study
JEL Classification: M42
Suggested Citation: Suggested Citation