Auditor Choice, Cost of Debt, Earnings Management in Private Firms

• In Event: Continental Breakfast - Research and Education Forum
  In Roundtable Session: Table 7: Effects of Audit Quality

Abstract

Auditor Choice has been widely explored by the literature. This study investigates private companies audited by audit firms in the period 2003 – 2012 in Italy, a country where private firms can choose their audit firm from: Big 4; Second-tier; Third-tier firms registered with CONSOB (Italian Securities and Exchange Commission) and Third-tier firms registered with Italian MINISTRY of Justice. We find that hiring a Big 4 auditor is associated to lower Cost of Debt and Earnings Management in private Firms. Furthermore, it is more beneficial to choose a Second-tier firm than a Third-tier firm. However, stakeholders do not perceive different quality within Third-tier: Audit Quality does not depend on whether the firm is on CONSOB or MINISTRY register. We conclude, thus, that size is the main driver of Auditor choice given that other differences between registers (insurance agains litigation, supervision authority, register fees, non-audit services prohibition, rotation, quality control review, sanctions anddisclosure) do not drive this choice.

Author

• Tatiana Mazza, Louisiana State University