The impact of voluntary audit on credit ratings: evidence from UK private firms

After a long period of universal mandatory audit, the UK reduced the regulatory burden of private firms by introducing size-based audit exemption in 1994; the size thresholds have subsequently been progressively increased. Both accounting bodies and credit-rating agencies (CRAs) have expressed res...

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Main Authors: Dedman, Elisabeth, Kausar, Asad
Other Authors: Nanyang Business School
Format: Article
Language:English
Published: 2013
Online Access:https://hdl.handle.net/10356/98445
http://hdl.handle.net/10220/12259
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Institution: Nanyang Technological University
Language: English
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spelling sg-ntu-dr.10356-984452023-05-19T06:44:40Z The impact of voluntary audit on credit ratings: evidence from UK private firms Dedman, Elisabeth Kausar, Asad Nanyang Business School After a long period of universal mandatory audit, the UK reduced the regulatory burden of private firms by introducing size-based audit exemption in 1994; the size thresholds have subsequently been progressively increased. Both accounting bodies and credit-rating agencies (CRAs) have expressed reservations about this policy, arguing it could diminish user confidence in reported accounting numbers, and lead to a reduction in financial statement quality and credit ratings. Prior research, however, suggests that the managers of small UK companies do not perceive there to be an association between financial statement audit and firm credit score. To provide evidence of any effect on user confidence of making audit optional, we examine the credit scores and financial reporting quality of a large sample of UK private firms which qualified for audit exemption after major threshold changes in 2004. We find that, even though they report lower average profits, companies which retain a voluntary audit enjoy significantly higher credit scores than those which opt out of audit. The results of both conservatism and accruals-based tests indicate that opting out of audit is associated with less conservative financial reporting, consistent with the concerns of the accounting bodies and the CRAs, and providing an explanation for why opt-out firms report higher profits but receive lower credit scores. This study contributes to an important policy debate by providing large sample evidence that the audit does confer benefits to private firms in terms of financial reporting quality, assurance and the credit scores generated from the financial reports. 2013-07-25T07:09:21Z 2019-12-06T19:55:20Z 2013-07-25T07:09:21Z 2019-12-06T19:55:20Z 2012 2012 Journal Article Dedman, E., & Kausar, A. (2012). The impact of voluntary audit on credit ratings: evidence from UK private firms. Accounting and Business Research, 42(4), 397-418. https://hdl.handle.net/10356/98445 http://hdl.handle.net/10220/12259 10.1080/00014788.2012.653761 en Accounting and business research © 2012 Taylor & Francis.
institution Nanyang Technological University
building NTU Library
continent Asia
country Singapore
Singapore
content_provider NTU Library
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language English
description After a long period of universal mandatory audit, the UK reduced the regulatory burden of private firms by introducing size-based audit exemption in 1994; the size thresholds have subsequently been progressively increased. Both accounting bodies and credit-rating agencies (CRAs) have expressed reservations about this policy, arguing it could diminish user confidence in reported accounting numbers, and lead to a reduction in financial statement quality and credit ratings. Prior research, however, suggests that the managers of small UK companies do not perceive there to be an association between financial statement audit and firm credit score. To provide evidence of any effect on user confidence of making audit optional, we examine the credit scores and financial reporting quality of a large sample of UK private firms which qualified for audit exemption after major threshold changes in 2004. We find that, even though they report lower average profits, companies which retain a voluntary audit enjoy significantly higher credit scores than those which opt out of audit. The results of both conservatism and accruals-based tests indicate that opting out of audit is associated with less conservative financial reporting, consistent with the concerns of the accounting bodies and the CRAs, and providing an explanation for why opt-out firms report higher profits but receive lower credit scores. This study contributes to an important policy debate by providing large sample evidence that the audit does confer benefits to private firms in terms of financial reporting quality, assurance and the credit scores generated from the financial reports.
author2 Nanyang Business School
author_facet Nanyang Business School
Dedman, Elisabeth
Kausar, Asad
format Article
author Dedman, Elisabeth
Kausar, Asad
spellingShingle Dedman, Elisabeth
Kausar, Asad
The impact of voluntary audit on credit ratings: evidence from UK private firms
author_sort Dedman, Elisabeth
title The impact of voluntary audit on credit ratings: evidence from UK private firms
title_short The impact of voluntary audit on credit ratings: evidence from UK private firms
title_full The impact of voluntary audit on credit ratings: evidence from UK private firms
title_fullStr The impact of voluntary audit on credit ratings: evidence from UK private firms
title_full_unstemmed The impact of voluntary audit on credit ratings: evidence from UK private firms
title_sort impact of voluntary audit on credit ratings: evidence from uk private firms
publishDate 2013
url https://hdl.handle.net/10356/98445
http://hdl.handle.net/10220/12259
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