Audit Exemption and the Demand for Voluntary Audit: A Comparative Study of the UK and Denmark

Abstract

This study investigates the sufficiency of turnover as a surrogate for demand for voluntary audit and compares the determinants in the UK and Denmark. Empirical data for the study were drawn from government surveys of the directors of small private companies in both countries, which were based on same research instrument. Bivariate tests support the hypothesized effects of turnover and a range of firm-specific factors suggested by economic rationality and agency theory. The main contribution of the study is the finding that turnover alone is not a sufficient surrogate for the costs and benefits of audit. The main predictors are turnover and a slightly different combination of management and agency factors in each country. The study provides a model that can be tested in other jurisdictions and its findings should be of interest to the accountancy profession and national regulators planning to introduce or revise audit exemption for small companies. Key wordsAudit exemption, Denmark, class B companies, small private companies, UK, voluntary audit Correspondence to: Dr Jill Collis, Reader in Accounting, Brunel Business School, Brunel University, Uxbridge UB8 3PH, UK. Email: jill.collis@brunel.ac.uk AcknowledgementsThe author is grateful to the anonymous reviewers for their guidance and to Professor Michael Bradbury (UNITEC Institute of Technology, Auckland, NZ) and Professor Len Skerratt (Brunel University, Uxbridge, UK) for helpful comments on the first draft of this paper. Thanks are also due to discussants at the AAA International Accounting Section Midyear Conference, Charleston and the EAA Annual Congress, Lisbon. Author profileJill has conducted research for the Institute of Chartered Accountants in England and Wales, the Association of Chartered Certified Accountants, the Professional Oversight Board, the Department of Trade and Industry and the Department for Business, Enterprise and Regulatory Reform. Her work in the UK has contributed to regulatory impact assessments in Denmark, Finland, Norway and Sweden. A main contribution of the study is the finding that turnover alone is not a sufficient surrogate for the costs and benefits of audit. A logistic regression model identifies the main predictors as turnover (as a proxy for wealth at risk), combined with a slightly different combination of management and agency factors in each country. In both countries, management factors are that the cost of audit is not considered a substantial expense and it improves the quality of the financial information. In Denmark, an additional benefit is the check on accounting records and systems, which suggests that risk reduction is more important there. As far as the agency factors are concerned, meeting shareholders' needs for assurance is a factor in Denmark, but in the UK it was specifically associated with companies that are not wholly family-owned 3 and, to a lesser extent, with companies that have external shareholders. This implies a lower level of trust in the UK. In Denmark, the benefit of audit in support...

Audit Exemption for Small and Medium Enterprises: Perceptions of Malaysian Auditors

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“…However, numerous studies have been performed in countries that have implemented deregulation, especially in the United Kingdom (UK) and European Union (EU). Studies conducted in the UK offered useful insights for policy makers to effect change based on the characteristics of small companies (Beaver & Prince, 2004;Collis, 2010;Collis & Jarvis, 2002). A certain revenue threshold for the companies that is eligible for exemption from annual audit can be determined.…”

“…In addition, SMEs that are small in size typically lack a strong internal control system, which is a necessary prerequisite for an unqualified or a clean audit opinion. Furthermore, smaller companies regard conventional audits as a costly activity that provides little value added (Collis, 2010;Kamarudin, Abidin, & Smith, 2012).…”

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“…As for private companies, (Collis 2010;Collis et al 2004;Seow 2001;Rennie et al 2003) find many small private companies who are exempt from regulatory requirements still opted to have an independent audit.…”