The influence of auditor’s opinion and auditor’s reputation on the cost of debtevidence from private Spanish firms

  1. Manuel Cano-Rodríguez 1
  2. Santiago Sánchez-Alegría 2
  3. Pablo Arenas-Torres 1
  1. 1 Universidad de Jaén. Departamento de Economía Financiera y Contabilidad
  2. 2 Universidad Pública de Navarra. Departamento de Gestión de Empresas
Revista:
Revista española de financiación y contabilidad

ISSN: 0210-2412

Año de publicación: 2016

Volumen: 45

Número: 1

Páginas: 32-62

Tipo: Artículo

DIALNET GOOGLE SCHOLAR

Otras publicaciones en: Revista española de financiación y contabilidad

Resumen

This paper addresses the relevance of auditor’s opinion and auditor’s reputation for the creditors of private companies in an environment of low demand for audit quality. By employing archival data from private Spanish firms, we find that Big-4 auditors’ clients bear a lower cost of debt, showing that the selection of a high-quality auditor is relevant for the creditors of the company. We also demonstrate that the content of audit reports is relevant for creditors, as they require a higher cost of debt from firms that have obtained a qualified audit report. The influence of auditor’s opinion on the cost of debt does not depend on type of auditor, suggesting that Big-4 auditors’ clients benefit from their auditor’s reputation, even when they receive a qualified audit report.

Referencias bibliográficas

  • J.Argenti, (Ed.). (1976). Corporate collapse: The causes and symptoms. London: McGraw-Hill Inc.
  • L.Arnedo-Arjona,, F.Lizarraga-Dallo,, & S.Sánchez-Alegría, (2008). Discretionary accruals and auditor behaviour in code-law contexts: An application to failing Spanish firms. European Accounting Review, 17(4), 641−666.
  • R.Ball,, & L.Shivakumar, (2005). Earnings quality in UK private firms: Comparative loss recognition timeliness. Journal of Accounting and Economics, 39(1), 83–128. doi:10.1016/j.jacceco.2004.04.001
  • S.Basu,, L.Hwang,, & C.Jan, (2001). Differences in Conservatism between Big Eight and Non-Big Eight Auditors. Working Paper. New York, NY: Baruch College.
  • C.L.Becker,, M.L.DeFond,, J.Jiambalvo,, & K.R.Subramanyam, (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1−24.
  • D.W.Blackwell,, T.R.Nolan,, & D.B.Winters, (1998). The value of auditor assurance: Evidence from loan pricing. Journal of Accounting Research, 36, 57−70. doi:10.2307/2491320
  • D.Burgstahler,, L.Hail,, & C.Leuz, (2006). The importance of reporting incentives: Earnings management in European private and public firms. The Accounting Review, 81(5), 983–1016. doi:10.2308/accr.2006.81.5.983
  • R.Bushman,, & J.Piotroski, (2006). Financial reporting incentives for conservative accounting: The influence of legal and political institutions. Journal of Accounting and Economics, 42(1–2), 107–148. doi:10.1016/j.jacceco.2005.10.005
  • M.Butler,, A.J.Leone,, & M.Willenborg, (2004). An empirical analysis of auditor reporting and its association with abnormal accruals. Journal of Accounting and Economics, 37(2), 139–165. doi:10.1016/j.jacceco.2003.06.004
  • M.Cano-Rodríguez, (2007). Auditor size and audit quality in the Spanish private sector. Revista Española de Financiación y Contabilidad, XXXVI(135), 481−508.
  • M.Cano-Rodríguez, (2010). Big auditors, private firms and accounting conservatism: Spanish evidence. European Accounting Review, 19(1), 131–159. doi:10.1080/09638180902989426
  • M.Cano-Rodríguez,, & S.Sánchez-Alegría, (2012). The value of audit quality in public and private companies: Evidence from Spain. Journal of Management & Governance, 16(4), 683–706. doi:10.1007/s10997-011-9183-4
  • J.Carcello,, A.Vanstraelen,, & M.Willenborg, (2009). Rules rather than discretion in audit standards: Going-concern opinions in Belgium. The Accounting Review, 84(5), 1395–1428. doi:10.2308/accr.2009.84.5.1395
  • G.Cassar, (2011). Discussion of the value of financial statement verification in debt financing: Evidence from private U.S. firms. Journal of Accounting Research, 49(2), 507–528. doi:10.1111/joar.2011.49.issue-2
  • P.Chaney,, D.Jeter,, & L.Shivakumar, (2004). Self-selection of auditors and audit pricing in private firms. The Accounting Review, 79(1), 51–72. doi:10.2308/accr.2004.79.1.51
  • P.F.Chen,, S.He,, Z.Ma,, & D.Stice, (2015). The information role of audit opinions in debt contracting. Journal of Accounting and Economics. Advance online publication. doi:10.1016/j.jacceco.2015.04.002
  • J.-H.Choi,, J.B.Kim,, X.Liu,, & D.Simunic, (2008). Audit pricing, legal liability regimes, and Big 4 premiums: Theory and cross-country evidence. Contemporary Accounting Research, 24(1), 13−46.
  • J.-H.Choi,, & T.Wong, (2007). Auditors’ governance functions and legal environments: An international investigation. Contemporary Accounting Research, 24(1), 13–46. doi:10.1506/X478-1075-4PW5-1501
  • C.W.Chow, (1982). The demand for external auditing: size, debt and ownership influences. The Accounting Review, 57(2), 272−291.
  • R.Chung,, M.Firth,, & J.-B.Kim, (2003). Auditor conservatism and reported earnings. Accounting and Business Research, 33(1), 19−32.
  • R.Chung,, M.Firth,, & J.-B.Kim, (2005). Earnings management, surplus free cash-flow, and external monitoring. Journal of Business Research, 58, 766−776.
  • L.Coppens,, & E.Peek, (2005). An analysis of earnings management by European private firms. Journal of International Accounting, Auditing and Taxation, 14(1), 1–17. doi:10.1016/j.intaccaudtax.2005.01.002
  • A.T.Craswell,, J.R.Francis,, & S.L.Taylor, (1995). Auditor brand name reputations and industry specialization. Journal of Accounting and Economics, 29, 297−332.
  • A.Craswell,, D.Stokes,, & J.Laughton, (2002). Auditor independence and fee dependence. Journal of Accounting and Economics, 33, 253–275. doi:10.1016/S0165-4101(02)00044-7
  • G.De Franco,, I.Gavious,, J.Y.Jin,, & G.D.Richardson, (2011). Do private company targets that hire Big 4 auditors receive higher proceeds? Contemporary Accounting Research, 28(1), 215–262. doi:10.1111/care.2011.28.issue-1
  • L.DeAngelo, (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183–199. doi:10.1016/0165-4101(81)90002-1
  • E.Dedman,, A.Kausar,, & C.Lennox, (2013). The demand for audit in private firms: Recent large-sample evidence from the UK. European Accounting Review, 23(1), 1−23.
  • M.L.DeFond,, & J.Jiambalvo, (1994). Debt covenant violation and manipulation of accruals. Journal of Accounting and Economics, 17(1–2), 145–176. doi:10.1016/0165-4101(94)90008-6
  • M.L.DeFond,, K.Raghunandan,, & K.Subramanyam, (2002). Do non-audit service fees impair auditor independence? Evidence from going concern audit opinions. Journal of Accounting Research, 40(4), 1247–1274. doi:10.1111/1475-679X.00088
  • S.Fortin,, & J.Pittman, (2007). The role of auditor choice in debt pricing in private firms. Contemporary Accounting Research, 24(3), 859–896. doi:10.1506/car.24.3.8
  • J.Francis,, R.LaFond,, P.Olsson,, & K.Schipper, (2005). The market pricing of accruals quality. Journal of Accounting and Economics, 39(2), 295–327. doi:10.1016/j.jacceco.2004.06.003
  • J.Francis,, & D.Wang, (2008). The joint effect of investor protection and Big 4 audits on earnings quality around the world. Contemporary Accounting Research, 25(1), 157–191. doi:10.1506/car.25.1.6
  • J.R.Francis, (2004). What do we know about audit quality? The British Accounting Review, 36, 345–368. doi:10.1016/j.bar.2004.09.003
  • J.R.Francis,, E.L.Maydew,, & H.C.Sparks, (1999). The role of Big 6 auditors in the credible reporting of accruals. AUDITING: A Journal of Practice & Theory, 18(2), 17–34. doi:10.2308/aud.1999.18.2.17
  • A.Gaeremynck,, S.Van Der Meulen,, & M.Willekens, (2008). Audit-firm portfolio characteristics and client financial reporting quality. European Accounting Review, 17(2), 243–270. doi:10.1080/09638180701705932
  • B.Gill-de-Albornoz Noguer,, & M.Illueca Muñoz, (2006). The effect of auditor reputation on the pricing of accruals: Evidence from privately held companies (Working Paper). Universitat Jaume I.
  • N.Gómez-Aguilar,, & E.Ruiz-Barbadillo, (2003). Do Spanish firms change auditor to avoid a qualified audit report? International Journal of Auditing, 7(1), 37–53. doi:10.1111/1099-1123.00004
  • J.J.Heckman, (1979). Sample selection bias as a specification. Econometrica, 47(1), 153−161.
  • O.-K.Hope,, J.C.Langli,, & W.B.Thomas, (2012). Agency conflicts and auditing in private firms. Accounting, Organizations and Society, 37, 500–517. doi:10.1016/j.aos.2012.06.002
  • D.Huguet,, & J.L.Gandía, (2014). Cost of debt capital and audit in Spanish SMEs. Spanish Journal of Finance and Accounting/Revista Española de Financiación y Contabilidad, 1−24. doi:10.1080/02102412.2014.942154
  • M.Jensen,, & W.Meckling, (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360. doi:10.1016/0304-405X(76)90026-X
  • J.Jones, (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228. doi:10.2307/2491047
  • S.Kallapur,, S.Sankaraguruswamy,, & Y.Zang, (2010). Audit market concentration and audit quality (Working Paper). Retrieved from SSRN: http://ssrn.com/abstract=1546356
  • J.Karjalainen, (2011). Audit quality and cost of debt capital for private firms: Evidence from Finland. International Journal of Auditing, 15(1), 88–108. doi:10.1111/ijau.2011.15.issue-1
  • I.Khurana,, & K.Raman, (2004). Litigation risk and the financial reporting credibility of Big 4 versus non-Big 4 audits: Evidence from Anglo-American countries. The Accounting Review, 79(2), 473–495. doi:10.2308/accr.2004.79.2.473
  • J.Kim,, D.Simunic,, M.Stein,, & C.Yi, (2011). Voluntary audits and the cost of debt capital for privately held firms: Korean evidence. Contemporary Accounting Research, 28(2), 585–615. doi:10.1111/care.2011.28.issue-2
  • J.-B.Kim,, R.Chung,, & M.Firth, (2003). Auditor conservatism, asymmetric monitoring and earnings management. Contemporary Accounting Research, 20(2), 323–359. doi:10.1506/J29K-MRUA-0APP-YJ6V
  • G.Krishnan, (2003). Audit quality and the pricing of discretionary accruals. AUDITING: A Journal of Practice & Theory, 22(1), 109–126. doi:10.2308/aud.2003.22.1.109
  • R.La Porta,, F.Lopez-de-Silanes,, A.Shleifer,, & R.W.Vishny, (1998). Law and finance. The Journal of Political Economy, 106(6), 1113–1155. doi:10.1086/250042
  • C.Lennox,, & J.A.Pittman, (2011). Voluntary audits versus mandatory audits. The Accounting Review, 86(5), 1655–1678. doi:10.2308/accr-10098
  • G.S.Lennox, (1999). Audit quality and auditor size: An evaluation of reputation and deep pockets hypotheses. Journal of Business Finance and Accounting, 26(7/8), 779–805. doi:10.1111/1468-5957.00275
  • Y.Li,, D.Stokes,, S.Taylor,, & L.Wong, (2009). Audit quality, earnings quality and the cost of equity capital (Working Paper). University of NSW, Capital Markets CRC and Sidney University of Technology.
  • J.C.Navarro García,, & I.Martínez Conesa, (2004). Earnings management and audit quality in Spain: An empirical study. Revista Española de Financiación y Contabilidad, XXXIII(123), 1025–1061.
  • W.Numan,, & M.Willekens, (2012). An empirical test of spatial competition in the audit market. Journal of Accounting and Economics, 53, 450–465. doi:10.1016/j.jacceco.2011.10.002
  • M.A.Petersen, (2009). Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies, 22, 435–480. doi:10.1093/rfs/hhn053
  • C.Piot,, & F.Missonier-Piera, (2007). Corporate governance reform and the cost of debt financing of listed French companies (Working Paper). Retrieved from SSRN:http://ssrn.com/abstract=960681
  • J.A.Pittman,, & S.Fortin, (2004). Auditor choice and the cost of debt capital for newly public firms. Journal of Accounting and Economics, 37(1), 113–136. doi:10.1016/j.2003.06.005
  • A.Prencipe,, S.Bar-Yosef,, & H.Dekker, (2014). Accounting research in family firms: Theoretical and empirical challenges. European Accounting Review, 23(3), 361–385. doi:10.1080/09638180.2014.895621
  • M.C.Pucheta Martínez,, A.Vico Martínez,, & M.A.García Benau, (2004). Reactions of the Spanish capital market to qualified audit reports. European Accounting Review, 13(4), 689–711.
  • J.K.Reynolds,, & J.R.Francis, (2000). Does size matter? The influence of large clients on office-level auditor reporting decisions. Journal of Accounting and Economics, 30(3), 375–400. doi:10.1016/S0165-4101(01)00010-6
  • J.P.Sánchez-Ballesta,, & E.García-Meca, (2010). Ownership structure and the cost of debt. European Accounting Review, 20(2), 389–416.
  • J.-L.Seow, (2001). The demand for the UK small company audit an agency perspective. International Small Business Journal, 19(2), 61–79. doi:10.1177/0266242601192004
  • T.Steijvers,, & W.Voordeckers, (2009). Private family ownership and the agency costs of debt. Family Business Review, 22(4), 333–346. doi:10.1177/0894486509338291
  • P.Taylor, (2013). What do we know about the role of financial reporting in debt contracting and debt covenants? Accounting and Business Research, 43(4), 386–417. doi:10.1080/00014788.2013.798551
  • S.Teoh,, & T.Wong, (1993). Perceived auditor quality and earnings response coefficient. The Accounting Review, 68(2), 346–367.
  • J.W.Tucker, (2010). Selection bias and econometric remedies in accounting and finance research. Journal of Accounting Literature, 29, 31–57.
  • B.Van Tendeloo,, & A.Vanstraelen, (2008). Earnings management and audit quality in Europe: Evidence from the private client segment market. European Accounting Review, 17(3), 447–469. doi:10.1080/09638180802016684
  • H.Vander Bauwhede,, & M.Willekens, (2004). Evidence on (the lack of) audit-quality differentiation in the private client segment of the Belgian audit market. European Accounting Review, 13(3), 501–522.
  • W.Wallace, (2004). The economic role of the audit in free and regulated markets: A look back and a look forward. Research in Accounting Regulation, 17, 267–298. doi:10.1016/S1052-0457(04)17012-4
  • M.E.Zmijewski, (1984). Methodological issues related to the estimation of financial distress prediction models. Journal of Accounting Research, 24(Supplement), 59–82.
Fuente de los datos: Dialnet