This study investigates whether managerial ownership related agency costs are associated with the demand for audit quality in a sample of small private firms. The literature on audit quality suggests that firms with high agency costs are more likely to demand audit quality. Our database enables us to compare the demand for audit quality with three different measures: demand for Big 4 auditors and two types of certified auditors with strict professional requirements. The results show that an increase in managerial ownership decreases the likelihood that the firm will engage a Big 4 auditor or a KHT certified auditor but it does not have an impact on the demand for lower level certified auditors. Our findings also support previous studies that suggest a nonlinear connection between managerial ownership and the demand for audit quality in terms of Big 4 audits. This suggests that higher quality audits by Big 4 audit firms are used to overcome agency costs induced by information asymmetries between shareholders and managers. An increase in leverage, on the other hand, increases the likelihood that the firm will engage a lower level certified auditor as opposed to a non-certified auditor. SUMMARYThe role of audit firm selection costs has been a much revisited topic in recent literature. It has been suggested in the literature that managers voluntarily increase the observability of their actions by hiring independent auditors to monitor their behavior.The purpose of this study is to investigate the association between managerial ownership and the demand for audit quality particularly in the context of private firms. These firms can be characterized as having severe information asymmetries between firm insiders and other stakeholders. Information asymmetry in particular is expected to increase the probability of agency conflicts between management and outside stakeholders, such as shareholders and creditors, as the possibility to utilize private information gives management incentives to act in self-interest instead of in the interests of other stakeholders.Our database enables us to investigate the choice between four different types of auditors: Big 4, KHT certified, HTM certified, and non-certified auditors. Finland has a two-tier system of auditor qualifications. The lower level qualified auditors are called HTM auditors (auditors and audit firms authorized by a local Chamber of Commerce) and higher level qualified auditors KHT auditors (auditors and audit firms authorized by the Central Chamber of Commerce). Also, during the sample period (2000)(2001)(2002)(2003)(2004)(2005)(2006) all Finnish firms were required to have a financial audit regardless of firm size.The main conclusion of this study is that managerial ownership has an important impact on the demand for audit quality in our sample of small private firms. We find evidence that the demand for audit quality increases as managerial ownership decreases. Specifically, we observe CEO's ownership to be inversely associated with the likelihood that private firms ...

The purpose of this paper is to examine the value relevance of the perceived audit quality in terms of who audits, as well as the audit outcomes in terms of the auditor's opinion and accruals quality, in the pricing of debt capital for privately held firms, by examining a large sample of privately held Finnish firms. The findings indicate that Big 4 audits and audits with more than one responsible auditor are associated with a decreased cost of debt capital. Also, firms with modified audit reports and those with lower quality accruals have a higher cost of debt capital. The findings suggest that both the perceived audit quality and audit outcomes are relevant in the pricing of debt capital for privately held firms. Additional analysis suggests that, while the outcomes of an audit are important in the pricing of debt regardless of a firm's size, the perceived audit quality is more important for larger privately held firms.

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The authors present empirical evidence of how family ownership and control affect the demand for audit quality measured by audit firm size in a sample of small private firms. The results indicate that family-held or -controlled firms are less likely to use Big 4 auditors than nonfamily firms and that an increase in family ownership decreases the likelihood of a Big 4 audit. The results imply that the less concentrated family ownership is, the more need there is for outside control mechanisms because of higher agency costs. The results imply that family influence increases firms' incentives to employ Big 4 audit firms, thereby increasing the credibility of their financial statements vis-à-vis outside stakeholders.

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We examine the effect of audit partner gender on the likelihood of issuing a modified audit opinion (MAO) across conditions in which the issuance of an MAO is warranted and/or that create incentives to report opportunistically at the audit-partner level. We find that, after an audit partner switch, female audit partners are more likely to issue first-time MAOs and MAOs generally and that female audit partners are more persistent in issuing MAOs. However, after correcting for self-selection bias, we do not find an effect on the part of audit partner gender on the likelihood of issuing an MAO in the case of partner-level opinion shopping, subsequently failing firms, or firms that are economically important at the audit-partner level. This stands in contrast with the previous evidence regarding the effect of audit partner gender on going-concern reporting. Overall, our study provides new evidence regarding the conditions that induce female audit partners to report more conservatively compared with male audit partners. The results imply that female audit partners report more conservatively if an MAO was issued in the previous year and if the audit partner has been switched.

This study investigates the role that board structure has on the demand for audit quality in connection with family ownership in a sample of private firms. In addition to this, we also shed light on whether ownership structure and board structure are substitute mechanisms in resolving agency costs in private family firms. Our main results show that the presence of outsiders on the board increases the demand for audit quality in the overall sample as well as in the presence of family ownership. Our results also confirm previous results and indicate that family firms are less likely to engage a Big 4 auditor even when we control for board structure. Additionally, we find that in a subsample of family firms the probability of choosing a Big 4 auditor decreases with an increase in CEO ownership and is higher in firms with outside boards. When we investigate the interaction between CEO ownership and outside boards, we find that role of outside boards is weaker when CEO ownership increases.

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