Financial Reporting Choices of Large Private Firms

• In Event: Auditor Choice

Abstract

We investigate large private firms’ choices to obtain audits, prepare GAAP financial statements and, if audited, use a Big 4 auditor. We also explore determinants of firms’ distribution of financial statements and the decision to obtain internal control audits. Using a sample of private funds (e.g., private equity and hedge funds), an increasingly important part of the economy, we find that nearly 80% of private firms not subject to mandatory audit requirements obtain audits voluntarily. Larger, older firms with more owners and more sophisticated owners are more likely to obtain audits, while firms with more inside ownership are less likely to obtain audits. Many of these same characteristics are associated with private firms’ decisions to use GAAP, engage a Big 4 auditor, obtain an internal control audit, and distribute financial statements to investors. Our evidence suggests investors’ information demands influence financial reporting decisions whereas debt usage appears to play a limited role in financial reporting choices. We also find that GAAP and Big 4 usage are positively associated with growth in both firm size and number of investors. Our analysis comprises the first examination of the financial reporting choices of private funds such as private equity, venture capital, and hedge funds.

Authors

• Jennifer J Gaver, University of Georgia

• Paul Mason, Baylor University

• Steve Utke, University of Connecticut