The Impact of Venture Capitalists on the Demand for the External Audit Function in Initial Public Offerings

Posted: 23 May 2003

See all articles by Suzanne G. Morsfield

Suzanne G. Morsfield

Columbia University - Center for Excellence in Accounting and Security Analysis

Christine E.L. Tan

City University of New York - Baruch College

William L. Felix

University of Arizona - Department of Accounting

Abstract

This paper examines the interaction of a little-studied stakeholder - the venture capitalist (VC) - with the audit function in the initial public offering (IPO) market. While the monitoring role of the external auditor has been studied in the IPO accounting literature, a relatively recent stream of research has begun to provide insight regarding the impact on a firm's reporting and accounting decisions/quality of other potential monitors - e.g., boards of directors, actuaries, etc. Finance and accounting research have both provided evidence consistent with the notion that VCs play a value-added role in their investee firms. This paper contributes to this stream of study by providing first time evidence that in an IPO context a VC provides monitoring value incremental to that of the external auditor. Specifically, our evidence suggests that VCs not only mitigate the demand for information from the external auditor, but that they also weaken the demand for insurance from the external audit function. To our knowledge this result has not been previously documented.

Keywords: Venture capital, Market for audit services

JEL Classification: M41, M49, G24

Suggested Citation

Morsfield, Suzanne G. and Tan, Christine and Felix, William L., The Impact of Venture Capitalists on the Demand for the External Audit Function in Initial Public Offerings. Available at SSRN: https://ssrn.com/abstract=385205

Suzanne G. Morsfield

Columbia University - Center for Excellence in Accounting and Security Analysis ( email )

3022 Broadway
New York, NY 10027
United States

Christine Tan (Contact Author)

City University of New York - Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3206 (Phone)
646-312-3161 (Fax)

William L. Felix

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States
520-621-2443 (Phone)
520-621-3742 (Fax)

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