Dedman, Elisabeth and Kausar, A.. (2012) The impact of voluntary audit on credit ratings: evidence from private UK firms. Accounting and Business Research, Vol.42 . ISSN 0001-4788

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Abstract

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 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 credit rating agencies, 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.

Item Type:	Journal Article
Subjects:	H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Divisions:	Faculty of Social Sciences > Warwick Business School > Marketing & Strategic Management Faculty of Social Sciences > Warwick Business School
Journal or Publication Title:	Accounting and Business Research
Publisher:	Routledge
ISSN:	0001-4788
Date:	2012
Volume:	Vol.42
Number of Pages:	37
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
URI:	http://wrap.warwick.ac.uk/id/eprint/44311

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