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Voluntary audits versus mandatory audits

journal contribution
posted on 2011-09-01, 00:00 authored by C S Lennox, Jeff PittmanJeff Pittman
Exploiting a natural experiment in which voluntary audits replace mandatory audits for U.K. private companies, we analyze whether imposing audits suppresses valuable information about the types of companies that would voluntarily choose to be audited. We control for the assurance benefits of auditing to isolate the role signaling plays by focusing on companies that are audited under both regimes. These companies experience no change in audit assurance, although they can now reveal for the first time their desire to be audited. We find that these companies attract upgrades to their credit ratings because they send a positive signal by submitting to an audit when this is no longer legally required. In contrast, companies that dispense with being audited suffer downgrades to their ratings because avoiding an audit sends a negative signal and removes its assurance value.

History

Journal

Accounting Review

Volume

86

Issue

5

Pagination

1655 - 1678

ISSN

0001-4826

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