Hannu Ojala

Drivers of Voluntary Audit in Finland: To Be or Not to Be Audited?

This paper examines factors affecting the owner-managers voluntary decision to hire an auditor in small firms. Using a random sample of 412 small private companies in Finland responding to an Internet survey, we first probe the institutional boundaries of a prior UK study [Collis, J., Jarvis, R., and Skerratt, L., 2004. The demand for the audit in small companies in the UK. Accounting and business research, 34 (2), 87–100] and conclude that its main findings can be generalised to a different regulatory setting (Finland) typical of many Continental European countries. Second, we broaden the prior research by testing new hypotheses regarding the drivers of an audit among small companies. We hypothesise and find evidence that outsourcing of critical accounting functions creates information asymmetry between the owner-manager and the external accountant, which may arouse the need for monitoring the external accountant through a voluntary audit. In addition, we find, as hypothesised, that tax advisory services provided by the external accountant reduce the likelihood of a voluntary audit. Moreover, we hypothesise that receiving a qualified opinion from the auditor reduces the likelihood of hiring an auditor voluntarily, whereas firms experiencing financial distress would be more willing to have their financial statements audited. We find evidence consistent with these hypotheses.

Audit quality and decision-making in small companies

Purpose - – This paper aims to focus on economic consequences of audit outcomes by investigating the concept of audit quality operationalised as seven components of audit benefits to owner-managers of small companies. Design/methodology/approach - – The authors analyse survey data collected in 2013 from 642 small private companies above the audit exemption threshold in Finland. Findings - – No significant association was found between engagement of a Big 4 auditor (proxy for audit quality) and any of the audit benefits tested. However, the results provide consistent evidence of a positive relationship between the owner-manager’s perception of the competence and reliability of the external accountant and the perceived benefits of audit. It was also found that companies which do not incorporate e-processes in the accounting system are more likely to value the internal control benefits provided by audit. Research limitations/implications - – Small business surveys suffer from poor response rates. To some extent, the authors overcame this problem by using two focused sampling frames and reminders. Care must be taken when generalising the results, as the definition of “small” varies across jurisdictions. Originality/value - – By focusing on small private companies, the research contributes to the audit quality literature. Contrary to studies of listed companies, the authors conclude that use of a Big 4 auditor is not a sufficient surrogate for audit quality in small companies. The authors go beyond aggregate measures of audit quality used in previous studies and identify specific audit benefits.

Responsiveness of Auditors to the Audit Risk Standards: Unique Evidence from Big 4 Audit Firms

Abstract We examine the effect of changes in audit risk standards on the conduct of financial statement audits in a European setting. We investigate this by analysing the audit hours and audit fees for clients of Big 4 audit firms in Finland in 1996 and 2010. Our results show that audit firms became more sensitive to clients’ business risk due to the introduction of the new audit risk standards, with more audit hours allocated to owner-managed companies in 2010 than in 1996, and fewer audit hours allocated to low-risk clients in 2010 than in 1996. Also, the labour mix in the audit team changed for owner-managed companies, with a greater work load carried by junior auditors in 2010 than in 1996. Regarding the price of audit, we find an increase in audit fees for clients with high business risk, while audit fees remained at roughly the same level for low-risk clients. These findings should be of interest to the auditing profession and those involved in the development of auditing regulations.

What Turns the Taxman On? The Effect of Tax Aggressiveness and Voluntary Audit on Adjustments to the Tax Returns of Private Companies

Using a large proprietary data set from the internal records of the Finnish Tax Administration for the fiscal year 2011, we examine the factors that trigger adjustments by the tax authority to the taxable income reported by around 25,000 small private companies. Using that data, we develop a new direct measure of tax aggressiveness and introduce the direct and indirect effects of external audit into the tax aggressiveness literature, whilst avoiding the classic endogeneity problem. We hypothesize and find that being tax aggressive increases the likelihood of the tax authority not accepting taxable income as reported, whereas having a voluntary audit with an unqualified audit opinion decreases it. We also find that an unqualified audit opinion moderates the positive effect of tax aggressiveness on the likelihood of the tax authority making adjustments. While these findings are statistically significant when tax aggressiveness is measured by the book-tax difference (non-taxable revenues less non-tax deductible expenses) reported in the company’s tax return, they are insignificant when measured by the conventional metric of book-tax difference based on publicly available financial statement data. The main results are insensitive to whether the full sample is used or a balanced sample based on propensity score pairing of tax-adjusted firms with their non-adjusted counterparts. The robustness tests show that our results are qualitatively unaffected by the modifications made to the variable definitions and sample composition.

Why Do Owner-Managers of Micro-Companies Opt for Voluntary Audits? The Importance of Debt Providers’ versus Entrepreneurs’ Needs

This study investigates the extent to which the pressures from outside stakeholders, specifically the providers of debt and trade credit, as opposed to owner-managers’ internal needs explain the use of voluntary audits in micro-companies. Whereas previous studies have mainly focused on how bank debt affects the demand for voluntary audit in small and medium-sized enterprises (SMEs), micro-companies have largely been overlooked in related prior literature. Using a sample of some 50,000 Finnish micro-companies over the period 2008-2010, we find that voluntary audit is expectedly more likely in micro-companies which have above average levels of trade credit or bank finance than those relying on owner’s equity. Surprisingly, the results also indicate that a very significant proportion of companies (26 percent) relying on owner’s equity only also choose voluntary audit. Interview data provide insights into the reasons hereof and confirm the benefits of audit in reducing control risk and business risk for management.