Auditor choice in private firms: a stakeholders perspective

Abstract

Purpose This paper aims to examine whether a private firm’s demand for a Big4 auditor is influenced by the auditor choice of its main supplier, customer and competitor. The authors rely on institutional theory to explain this stakeholders’ influence. The authors also examine whether the extent to which the firm’s board of directors engages in networking moderates this influence. Design/methodology/approach Questionnaire data are combined with archival data of 210 Belgian private firms with a statutory audit requirement. Logistic regression analysis is applied to examine to what extent firms follow their main competitor, customer and supplier in hiring a Big4 auditor. Findings The results reveal a positive association between the firm’s choice of a Big4 auditor and its main supplier being audited by a Big4 auditor, supporting the conformance effect (isomorphism) toward suppliers as hypothesized by institutional theory. The extent of board networking, however, seems to weaken this effect. Toward competitors, a divergence effect instead of a conformance effect is found, which indicates the existence of competitive differentiation regarding auditor choice. Research limitations/implications While prior studies mainly focus on the agency relationships between shareholders, debtholders and managers to explain auditor choice, this study also takes into account the firm’s other main stakeholders by relying on institutional theory. Both the conformance effect toward suppliers as well as the divergence effect toward competitors provide interesting additional perspectives on why auditors are demanded, leading to interesting future research opportunities. Originality/value This paper fulfills an identified need to consider additional theories in explaining audit outcomes.

Determinants of auditor choice: Review of the empirical literature

“…DiMaggio and Powell () suggested that this institutional isomorphism is the product of three external forces to which organizations respond: coercive, mimetic, or normative forces. According to our reading, Corten, Steijvers, and Lybaert () is the only auditor choice literature that employed the theory of institutional isomorphism explicitly. Corten et al () revealed that there is a positive association between Big 4 auditor appointment and a firms' main suppliers also being audited by a Big 4 auditor, supporting the conformance effect (isomorphism) toward suppliers, as hypothesized by institutional theory and the resource independence view…”

Narratives of the Big-4 transparency reports: country effects or firm strategy?

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The value of public audit - theories and empirical evidence

“…Their role is to evaluate the degree of compliance with the spending policies of the available funds, in particular to ensure that there is a compliant spending framework. Some activities prior to the actual audit still retain important weight in some countries in the Balkans, but also in some places in Western Europe, for example in Belgium (Cordery & Hay, 2020, Corten et al, 2018. Other activities that may fall under compliance are those carried out in relation to private enterprises if they are engaged in economic and financial relations with the public sector.…”