By understanding the auditor selection decisions and the agency costs faced in many private firms, auditors of private firms can more appropriately gauge risk and better understand their clients.

For more information on this study, please contact Ole-Kristian Hope.
 

Hope, O., Langli, J. C., and Thomas, W. B. 2012. Agency Conflicts and Auditing in Private Firms. Accounting, Organizations and Society 37 (7): 500-517.

The purpose of this study is to determine how privately held firms handle agency costs; specifically agency costs related to ownership structures. Also, this study examines how those agency costs affect audit fees and auditor selection criteria.

Using data from 2000 to 2002 and 2006 to 2007, which were obtained with special permission from the Norwegian government, the authors test the agency costs associated with familial ties in private settings. Specifically, the authors are interested in effort, as measured by audit fees, and desire to send a strong signal as measured by hiring a big 4 auditor.

This paper tests several hypotheses but some of the most important findings are:

• Audit fees decrease as ownership concentration increases and as the proportion of shares held by the second largest shareholder increases
• As CEO ownership increases audit fees decrease
• When the CEO is a member of the largest owning family audit fees increase
• Audit fees decrease as the proportion of board members from the largest owning family decreases
   

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