Determinants and Effects of Auditor Choice in Private Firms

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 10: External and Internal Auditor Choice

Abstract

Our study looks at the determinants of auditor choice in the private sector by examining and analyzing a unique database of private banks. Public companies primarily choose high quality auditors in order to decrease information asymmetry. Private companies have different demand functions when it comes to auditor choice, as information asymmetry is generally lower and thus not as important when considering auditor choice. We hypothesize and find that information asymmetry is indeed a determinant of auditor choice in private firms. We also hypothesize and find that product market competition and auditor market competition are also determinants of auditor choice in private firms. Finally, we hypothesize and find that private banks who select higher quality auditors have more conservative loan loss provisions. This study contributes to accounting literature by considering a topic that has not been studied before: auditor choice of U.S. private firms. It also provides insight into the banking industry with regard to auditor choice.

Authors

• Curtis Hall, Drexel University

• Benjamin Hoffman, Kent State University - Kent

• Zenghui Liu, Drexel University