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GAO, 2008. Audits of public companies. Continued Concentration in Audit Market for Large Public Companies Does Not Call for Immediate Action. United States Government Accountability Office.

De Franco, G. I. Gavious, J.Y. Jin, and G.D. Richardson, 2011. Do Private Company Targets that Hire Big 4 Auditors Receive Higher Proceeds? Contemporary Accounting Research, 28(1), pp. 215– 262.

Hay, D. and D. Davis, 2004. The Voluntary Choice of an Auditor of Any Level of Quality. Auditing: A Journal of Practice and Theory, 23(2), pp. 37-53.

Hope, O.-K., and J.C. Langli, 2010. Auditor Independence in a Private Firm and Low Litigation Setting.

The Accounting Review, 85(2), pp. 573-605.

Hope, O-K., J.C. Langli, and W.B. Thomas, 2012. Agency conflicts and auditing in private firms.

Accounting, Organizations, and Society, 37, pp. 500–517 Hope, O.-K., W.B. Thomas, and D. Vyas, 2011. Financial Credibility, Ownership, and Financing Constraints in Private Firms. Journal of International Business Studies, 42, pp. 935-957.

Johnson, E., I.K. Khurana, and K.J. Reynolds, 2002. Audit-Firm Tenure and the Quality of Financial Reports. Contemporary Accounting Research, 19(4), pp. 637–660.

Karjalainen, J., 2011. Audit Quality and Cost of Debt Capital for Private Firms: Evidence from Finland.

International Journal of Auditing, 15, pp. 88–108.

Kelley, T., and L. Margheim, 1990. The impact of time budget pressure, personality, and leadership variables on dysfunctional auditor behavior. Auditing: A Journal of Practice & Theory, 9(2), pp.


Knechel, W.R., G.V. Krishnan, M.B. Pevzner, L. Shefchik, and U. Velury, 2012. Audit Quality: Insights from the Academic Literature. Auditing: A Journal of Practice & Theory, In-Press.

Knechel, W.R., L. Niemi, and S. Sundgren, 2008. Determinants of Auditor Choice: Evidence from a Small Client Market. International Journal of Auditing, 12, pp. 65–88.

Kim, J.-B., D.A. Simunic, M.T. Stein, C.H. Yi, 2011. Voluntary Audits and the Cost of Debt Capital for Privately Held Firms: Korean Evidence. Contemporary Accounting Research, 28(2), pp. 585– 615.

Lennox, C., 2005. Management Ownership and Audit Firm Size. Contemporary Accounting Research, 22(1), pp. 205-227.

Lennox, C.S., and J.A. Pittman, 2011. Voluntary Audits versus Mandatory Audits. The Accounting Review, 86(5), pp. 1655-1678.

Lennox, C.-S., J.R. Francis, and Z. Wang, 2012. Selection Models in Accounting Research. The Accounting Review, 87(2), pp. 589-616 López, D. and G.F. Peters, 2012. The Effect of Workload Compression on Audit Quality. Auditing: A Journal of Practice & Theory, 31(4), pp. 139–165.

Nobes, C., 2010. On Researching into the Use of IFRS by Private Entities in Europe. Accounting in Europe, 7(1), pp. 213-217.

Niemi, L, 2004. Auditor Size and Audit Pricing: Evidence from Small Audit Firms. European Accounting Review, 13(3), pp. 541-560.

Niemi, L. and S. Sundgren, 2012. Are Modified Audit Opinions Related to the Availability of Credit?

Evidence from Finnish SMEs. European Accounting Review, 21(4), pp. 767–796.

Niemi, L., J.Kinnunen, H.Ojala, and P.Troberg, 2012. Drivers of voluntary audits in Finland: To be or not to be audited? Accounting and Business Research, 42(2): 169-196.

Minnis, M., 2011. The Value of Financial Statement Verification in Debt Financing: Evidence from Private Firms. Journal of Accounting Research, 49, pp. 457–506.

Salman, F.M. and E. Carson, 2009. The Impact of the Sarbanes-Oxley Act on the Audit Fees of Australian Listed Firms. International Journal of Auditing, 13, pp. 127–140 Senkow, D.W., M.D. Rennie, R.D. Rennie, and J.W. Wong, 2001. The audit retention decision in the face of deregulation: Evidence from large Canadian Corporations. Auditing: A Journal of Practice & Theory, 20 (2), pp. 101-113.

Sharma, P. and M. Carney, 2012. Value Creation and Performance in Private Family Firms:

Measurement and Methodological Issues. Family Business Review, 25(3), pp. 233–242.

Stewart, A. and M.A. Hitt, 2012. Why Can’t a Family Business Be More Like a Nonfamily Business?

Modes of Professionalization in Family Firms. Family Business Review, 25(1), p. 58-86.

Sundgren, S. and T. Svanström, 2012a. Audit Office Size, Audit Quality, and Audit Pricing: Evidence from private firms. Accounting and Business Research, forthcoming.

Sundgren, S. and T. Svanström, 2012b. Auditor-in-Charge Characteristics and Going Concern Reporting. Working paper, BI Norwegian Business School and University of Vaasa.

Svanström, T., 2012. Non-audit Services and Audit Quality: Evidence from Private Firms. European Accounting Review, forthcoming.

Svanström, T. and S. Sundgren, 2012. The demand for Non-Audit Services and Auditor-Client Relationships - Evidence from Swedish Small and Medium-Sized Companies. International Journal of Auditing 16: 54-78.

Van Tendeloo, B., and A. Vanstraelen, 2008. Earnings Management and Audit Quality in Europe:

Evidence from the Private Client Segment Market. European Accounting Review, 2008, 17(3), pp. 447-469.

Wright, M.E. and R.A. Davidson, 2000. The Effect of Auditor Attestation and Tolerance for Ambiguity on Commercial Lending Decisions. Auditing: A Journal of Practice & Theory, 19(2), pp. 67-81.

Wymenga, P., V. Spanikova, A. Barker, J. Konings, and E. Canton, 2012. EU SMEs in 2012: at the crossroads. Annual report on small and medium-sized enterprises in the EU, 2011/12. Ecorys, Rotterdam.

Zahra, S.A., J.C. Hayton, and C. Salvato, 2004. Entrepreneurship in Family vs. Non-Family Firms: A Resource-Based Analysis of the Effect of Organizational Culture. Entrepreneurship: Theory & Practice, 28(4), pp. 363-381.

Zerni, M., E. Haapama, T. Jarvinen, and L. Niemi, 2012. Do Joint Audits Improve Audit Quality?

Evidence from Voluntary Joint Audits. European Accounting Review, 21(4), pp. 731–765.

Willekens, M. and C. Achmadi, 2003. Pricing and supplier concentration in the private client segment of the audit market: market power or competition? The International Journal of Accounting, 38, pp. 431-455.

By public firms we mean firms that sell stocks or bonds to individual investors in public markets or have their stocks or bonds traded in organized markets. Private firms are non-public firms. The legal definition of public firms varies between jurisdictions, and in many countries public firms encompass more firms than those that are listed (Nobes 2010). Businesses may be organized in different legal forms and for non-listed firms a variety of legal forms are possible subject to national legislation. We restrict our discussion to firms with limited liability in order to easy the exposition. For the same reason we disregard not-for-profit organizations, municipalities, and firms that operate in industries with specific regulation due to their significance to the society or because they hold assets for a broad group of outsiders (e.g. financial institutions as banks and insurance companies, utilities, trade unions and charities).

The fourth EU directive sets out the minimum requirements for the preparation, content and disclosure of annual accounts for private and public firms, and the directive is implemented in all the member states.

Member states may allow small firms to prepare abridged accounts and to only make the accounts available at the company’s registered office (European Commission 1978, article 47). In many EU countries national law requires filing of annual accounts by a public registry. The thresholds defining small companies are reviewed every fourth year. As of 2012 firms that do not exceed two of the three following criteria are regarded as small companies in the fourth directive: total assets ≤ EUR 4 400 000 €; net turnover ≤ 8 800 000 €; and average number of employees ≤ 50 (European Commission 2006). These thresholds set out the maximum values, and member states may decide lower thresholds. In 2009 it was proposed that micro entities should be exempted from the accounting directives (European Commission 2009). According to the proposal, micro entities are firms which on their balance sheet dates do not exceed two of the three following criteria: total assets ≤ 500,000 €, net turnover ≤ 1,000,000 €, and average number of employees ≤ 10.

The figure will be updated The empirical evidence we cover in this review uses data from Belgium, Korea, Finland, France, Netherlands, Norway, Spain, Sweden, UK and US, which we assume partly reflects data availability and partly the domicile of the researchers. There are data available for a number of countries, and the Orbis database covers 65,000 listed companies and more than 100 million private companies from around the world (http://www.bvdinfo.com/Products/Company-Information/International/ORBIS.aspx, visited November 22, 2012). In addition do tax authorities, banks, credit rating agencies, central banks, governmental statistics offices, and international organizations collect data which may be available for researchers.

We refer to the largest international audit firms as Big N. Until 1989 there were eight firms (Arthur Andersen, Arthur Young & Co, Coppers & Lybrand, Ernst & Whinney, Deloitte Haskins & Sells, Peat Marwick Mitchell, Price Waterhouse and Touche Ross). In 1989 the Big Eight was reduced to Big Six due to the merger of Ernst & Whinney and Arthur Young into Ernst & Young and the merger of Deloitte, Haskins & Sells and Touche Ross into Deloitte & Touche. In 1998 PricewaterhouseCoopers was formed by a merger between Price Waterhouse and Coopers & Lybrand, reducing Big Six to Big Five. When Arthur Andersen ceased to exist in 2002 after the Enron scandal, the number of large international auditing firm was reduced to four.

The relationship between fee and industry expertise is hard to interpret as “there is no clear consensus as to whether specialization leads to superior audit quality (i.e. effectiveness), increasing audit efficiency, or a less competitive market” (Causholli, De Martinis, Hay, and Knechel 2010: 171).

Niemi (2004), using actual billing hours from Finish auditing firms, finds that the larger audit firms deliver more audit hours than smaller audit firms.

Knechel et al. (2012) summarize the evidence for public firms and show that audit quality, proxied with these outcome measures, is positively associated with Big N-auditors, industry experts, experienced auditors and the size of the audit office.

Unconditional conservatism refers to the tendency to understate assets and/or overstate liabilities without considering economic outcomes. For instance may firm decide immediate expensing of all internally generated assets irrespective of whether capitalizing will give better matching of revenues and expenses or not.

Conditional conservatism refers to the asymmetric treatment of unrealized gains or losses, where unrealized losses are charged to the income statement when expected while a much higher degree of certainty is required to recognize unrealized gains. Conditional conservatism improves contracting efficiency and is therefore viewed as increasing accounting quality. Unconditional conservatism does not since choosing alternatives that reduce income/assets/equity by default reduces the informational value of financial statements (for instance not capitalize internally generate assets when the asset meets the recognition criteria).

The environments faced by public firms in different countries are much more homogeneous compared to the environments that surround private firms. Also managers and owners incentives are more homogeneous due to the common need of satisfying the capital markets expectations regarding firm specific information and a competitive return.

Goodwin (2011), who analyzes Australian listed firms, finds that 29 percent of all audits are performed by audit partners that have only one or two clients and that the average auditors signs off 2,52 audits. It is hard to imagine that an auditor can be regarded as independent if all income comes from one or two clients. Thus, it is obvious that most auditors of public firms must have private clients.

This is not particular for auditing studies, but for also for studies in accounting (see e.g. Ball and Shivakumar 2006 and Burgstahler, Hail, and Leuz 2006).

Similar to accounting and auditing research using public firms, there is a selection problem also in private firm studies that might bias the results because firms are not randomly allocated to discrete groups (i.e. stay public or go private; voluntarily choose an auditor or not, choose a Big N auditor or not; and manipulate earnings or not). For discussion of the selection problem, we refer to Lennox, Francis, and Wang (2012) and Clatworthy et al. (2009).

«Research suggests that 80 percent of all businesses in the United States are family owned (Daily and Dollinger 1992) and family businesses contribute between 50 percent and 60 percent of U.S. gross domestic product (Francis 1993; Upton 1991). Similar findings have been reported in the UK (Stoy Hayward and The London Business School 1989, 1990), Western Europe (Lank 1995), and Australia (Smyrnios and Romano 1994;

Smyrnios et al. 1997). Providing further evidence of the contribution of family business to the economy, La Porta et al. (1999) and Schleifer and Vishny (1986) find that the ownership structure of even large public companies is characterized by controlling stockholders who are more often families, usually the founder or their descendants.» (Carey, Simnett, and Tanewski 2000 p. 37).

It may also be important to take into account that family firms by no means are free from agency conflicts.

According to (Dyer 2006: 260), family firms may serve as “the breeding grounds for relationships fraught with conflict”. Thus, family firms are not homogeneous due to e.g. varying degree of family ownership and family involvement in boards and management. For instance are some founder-led while other are owned and managed by subsequent generations, which may have implications for family firms willingness and ability to take risk (Zahra, Hayton, and Salvato 2004: 364) and performance (Stewart and Hitt 2012).

Hope et al. (2012) incorporate variables capturing family ownership, family involvement in boards and management, and family ties between owners, board members and CEOs into the tests. Hope and Langli (2010) supplement association tests with change tests. Many variables that account for firm heterogeneity in ownership, board composition and management in private firms are stable over time, and if they are constant these variables disappear in the change tests. Cano Rodríguez and Alegría (2012) is an example of the use of panel data techniques that controls for unobserved firm-specific variables that are constant over time.

Minnis (2011) address omitted variables in one paragraph (in section 5.7). Cassar (2011) discusses Minnis (2011), and he greatly expands the discussion of how omitted variable may threaten the results in Minnis (2011). The strength of the discussion of omitted variable in both studies is that they exemplify by suggesting specific variables that are omitted.

The CCGR Working Paper Series: Contents The papers may be downloaded without charge from our website http://www.bi.edu/ccgr

Ole-Kristian Hope and John Christian Langli:

1/2007 Auditor Independence in a Private Firm and Low Litigation Risk Setting Revised April 2009 Accepted for publication in the Accounting Review June 2009

–  –  –

Øyvind Norli, Charlotte Ostergaard and Ibolya Schindele:

1/2009 Liquidity and Shareholder Activism Revised April 2010

Roland E. Kidwell and Arne Nygaard:

1/2010 The Dual-Agency Problem Reconsidered: A Strategic Deviance Perspective on the Franchise Form of Organizing Revised September 2010

–  –  –

Mohammad Abdolmohammadi, Erlend Kvaal and John Christian Langli:

3/2010 Earnings Management Priorities of Private Family Firms November 2010

Sturla Lyngnes Fjesme, Roni Michaely and Øyvind Norli:

4/2010 Using Brokerage Commissions to Secure IPO Allocations November 2010

Charlotte Ostergaard, Amir Sasson, and Bent E. Sørensen:

1/2011 The Marginal Value of Cash, Cash Flow Sensitivities, and Bank-Finance Shocks in Nonlisted Firms January 2011

–  –  –

Charlotte Ostergaard and David C. Smith:

3/2011 Corporate Governance Before There Was Corporate Law April 2011

Sturla Lyngnes Fjesme and Øyvind Norli:

4/2011 Initial Public Offering or Initial Private Placement?

April 2011

Janis Berzin, Øyvind Bøhren and Bogdan Stacescu:

5/2011 Dividends and Stockholder Conflicts: A Comprehensive Test for Private Firms December 2011

–  –  –

John Christian Langli and Tobias Svanström:

1/2013 Audits of private firms January 2013 The Centre for Corporate Governance Research (CCGR) conducts research on the relationship between corporate governance, firm behavior, and stakeholder welfare. Our projects pay particular attention to the governance of closely held firms and family firms, and the research teams come from different disciplines in several countries. Financing is provided by private sponsors and the Research Council of Norway.

The CCGR is organized by the Department of Financial Economics at BI Norwegian Business School in Oslo, Norway (http://www.bi.edu) Centre for Corporate Governance Research BI Norwegian Business School Nydalsveien 37 N-0442 OSLO Norway http://www.bi.edu/ccgr

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