Audit Exemptions and Compliance with Tax and Accounting Regulations

Forthcoming, Accounting and Business Research

65 Pages Posted: 1 Apr 2017 Last revised: 18 Feb 2018

See all articles by Jeff Downing

Jeff Downing

National Research University Higher School of Economics

John Christian Langli

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

Date Written: February 15, 2018

Abstract

We examine small firms’ compliance with tax and accounting regulations before and after a change in the threshold for mandatory auditing. Prior to 2011, all Norwegian firms were required to be audited. In 2011, a law change allowed small Norwegian firms to choose not to be audited. After this change, the Norwegian Directorate of Taxes conducted on- and off-site inspections of a representative sample of 2,117 Norwegian firms, with a focus on compliance with specific requirements in tax and accounting regulation. We use the results from these inspections to construct a compliance quality score (CQS). We find that the firms that chose to opt out of auditing have lower CQS than do firms that chose to continue to be audited; that the CQS of firms that chose not to be audited declined after opting out; and that some of the opt-out firms fully mitigated the decline in CQS by engaging external accountants or auditors to prepare their annual financial statements. The results should be of interest to regulators considering increasing the thresholds for mandatory auditing, as our results show that (i) firms that choose not to be audited can experience a decline in CQS after opting out, and (ii) CQS can be maintained at the same level as before if opt-out firms engage external consultants that assist in preparing the annual accounts.

Keywords: private firms, audit exemption, compliance, accountants, auditor

Suggested Citation

Downing, Jeff and Langli, John Christian, Audit Exemptions and Compliance with Tax and Accounting Regulations (February 15, 2018). Forthcoming, Accounting and Business Research, Available at SSRN: https://ssrn.com/abstract=2944007 or http://dx.doi.org/10.2139/ssrn.2944007

Jeff Downing

National Research University Higher School of Economics ( email )

Soyza Pechatnikov str., 15
St. Petersburg, 190068
Russia

John Christian Langli (Contact Author)

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

N-0442 Oslo
Norway

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