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School of Business | Department of Accounting | Accounting | 2015
Thesis number: 14113
Voluntary audit, earnings quality, and the cost of debt: Evidence from small Finnish companies exempt from mandatory audit since 2007
Author: Saukola, Heikki
Title: Voluntary audit, earnings quality, and the cost of debt: Evidence from small Finnish companies exempt from mandatory audit since 2007
Year: 2015  Language: eng
Department: Department of Accounting
Academic subject: Accounting
Index terms: laskentatoimi; accounting; tilintarkastus; auditing; pienyritykset; small businesses; tulos; return; laatu; quality; pääoma; capital; kustannukset; costs
Pages: 74
Key terms: earnings quality; earnings management; abnormal accruals; small companies; voluntary audit

The purpose of this study is to examine the impact of voluntary audit on the earnings quality of small Finnish firms which qualified for audit exemption when the new Finnish Auditing Act entered into force in 2007. The study also aims to examine the effects of voluntary audit and earnings quality on the cost of debt of these small Finnish firms. The study contributes to the ongoing discussion on voluntary small company audits.


The full sample used in the study contains 8,816 small Finnish companies which were exempt from statutory audit in 2008 (3,016 of which were voluntarily audited and 5,800 not audited then). Difference-in-differences models are used in estimating the effect of auditing on earnings quality and cost of debt utilizing the full sample. Propensity score matching is used as an alternative method in estimating the same effects, utilizing a balanced sample of 2,866 matched pairs of companies. The relation between earnings quality and cost of debt is analyzed by calculating the mean cost of debt for each quintile of ranked earnings quality measure distributions.

The study employs a broad definition of earnings quality, whereby it is conditional on the decision-relevance of information provided by earnings and hence defined in the context of a specific decision model. Given that no single earnings quality measure is best for all decision models, several earnings quality proxies are used in this study. These include various measures utilizing accruals and residuals from a cross-sectional abnormal accruals model, a measure of timely loss recognition, and a metric of value relevance.


Overall, the results suggest that not being audited has a negative (or being audited equivalently positive) impact on earnings quality as evaluated by several earnings quality measures. Strong evidence was found suggesting that poorer earnings quality is associated with higher cost of debt, while no evidence was found on the impact of auditing on the cost of debt.
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