Does voluntary auditing help ventures? Evidence from Sweden

ABSTRACT

Auditing in ventures may provide the necessary financial reporting bulwark, however, auditing also has direct and indirect costs that may be less efficacious in a venture with limited routines and capabilities, and could take an entrepreneur’s attention away from venture goals. We draw on a quasi-natural experiment in Sweden, where from 2011 small private firms meeting threshold criteria were exempt from audit. The law resulted in three groups of ventures – (i) those who were above the threshold criteria and continued with an audit, and among those who were exempt some chose to (ii) voluntarily audit or (iii) opted-out of the audit. Starting with ventures established in 2007 (about three years before the passage of the law), and drawing records of the Swedish Companies Registration Office, our results show that while opting out of audit slightly improves the odds of survival, it has detrimental effects when sales volatility or return on assets are high. Those voluntary auditing can realize a higher debt ratio, but also face a decline in sales and net profit. The findings have implications for entrepreneurs in particular and policymakers considering initiation or repealing of audit requirements for ventures.

KEYWORDS:

• Auditing
• venture
• survival
• Sweden

JEL CLASSIFICATION:

• M4
• M42

Data availability

The study is based on data from the Swedish Companies Registration Office.

Disclosure statement

The authors have no conflict of interest and did not receive funding for the research.

Notes

¹ Source: Eurostat https://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=bd_9bd_sz_cl_r2&lang=en

² Based on Kausar, Shroff, and White (2016): ‘External audits were mandatory for U.K. private firms with sales above £1 million or assets above £1.4 million until 2004, but firms below these size thresholds were exempt from the audit requirement. In 2004, this audit exemption was extended to private firms with sales (assets) in between £1 and 5.6 million (£1.4–2.8 million), i.e. audits became voluntary for additional firms within the prescribed size threshold.’ (page 158).

³ Second, in Norway starting in May 2011, small limited-liability companies with less than 5 million NOK in annual revenue, less than NOK 20 million in total assets, and fewer than 10 employees could choose not to have audit.

Additional information

Funding

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.