Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

research summary

    The Relative Importance of Firm Incentives versus Country...
    research summary posted July 30, 2015 by Jennifer M Mueller-Phillips, tagged 15.0 International Matters 
    259 Views
    Title:
    The Relative Importance of Firm Incentives versus Country Factors in the Demand for Assurance Services by Private Entities.
    Practical Implications:

    Firm incentives for audits and reviews are relatively more important than country factors in weak countries than in strong countries, which is consistent with the idea that voluntary assurance services can substitute for the weaknesses in a country’s institutional environment. The study contributes to understanding the private demand for assurance services by analyzing the joint role of firm specific incentives and country-level institutional factors for a broad sample of countries. Importantly, a cross-country framework is essential to study the role of both firm incentives and country factors on the voluntary assurance decision.

    Citation:

     Francis, J. R., Khurana, I. K., Martin, X., & Pereira, R. 2011. The Relative Importance of Firm Incentives versus Country Factors in the Demand for Assurance Services by Private Entities. Contemporary Accounting Research 28 (2): 487-516.

    Keywords:
    capital market, international accounting standards, private companies, financial crisis
    Purpose of the Study:

    Recent accounting research suggests that the contracting environment stemming from a country’s legal system and other institutional characteristics plays an important role in shaping accounting and auditing practices within a country and explaining differences in accounting practices across countries. The contracting process observed in the United States, including the use of accounting and auditing to mitigate agency problems, is in part a consequence of the high quality of investor protection. However, in countries with weak investor protection, a firm with financing needs may be unable to credibly reduce information asymmetry even though it would like to do so in order to obtain external financing. The authors ask two questions:

    • Is there more voluntary use of assurance services by private firms when a country’s institutions are strong and protect investor rights, which in turn facilitates private contracting?
    • Or, alternatively, is voluntary use of assurance services more likely to occur as a substitute for weak country-level institutions that do not adequately protect investors?
    Design/Method/ Approach:

    The sample utilizes data from the World Business Environment Survey (WBES) of 62 countries carried out by the World Bank in late 1999 and early 2000. The sample consists of 3,829 private entities. A stratified random sampling methodology was used for each country to draw a sample from a well-defined universe of firms.

    Findings:

    The initial tests show that a private firm’s voluntary use of assurance services is explained by firm-specific contracting incentives over and above the effects of country-level factors. However, the opposite is also true: country factors are significant over and above firm incentives. Thus both sets of factors are important in explaining voluntary use of assurance services. So, while the underlying institutions in a country are important in shaping the contract environment, firm-level contracting incentives are also important determinants of the governance structure of private entities and the decision to have voluntary assurance services. In countries with high gross domestic product, firm and country factors are equally explanatory. In low-GDP countries, firm incentives played a much greater role in determining whether external auditing services were used.

    Category:
    International Matters