Cost of debt capital and audit in Spanish SMEs

Abstract

Evidence about the effect of voluntary audits on the cost of debt is mixed, and there is no research about the effects of mandatory audits and the non-compliance with the audit requirement. Using a sample of Spanish SMEs, where some companies are exempt from audit and some are mandatorily audited, we examine if audits, either mandatory or voluntary, help to reduce the cost of debt. We do not find a significant association between voluntary audits and cost of debt, whereas companies that breach the audit requirement have a higher cost of debt than the mandatorily audited ones. This suggests that differences in the cost of debt between audited and unaudited companies are associated with a “punishment” for companies that shun the mandatory audit rather than a “reward” for voluntarily audited companies. Moreover, within audited SMEs, we do not find that those audited by large auditors have a lower cost of debt.

La evidencia sobre la relación entre el coste financiero y la auditoría voluntaria es mixta, y no existe literatura empírica sobre los efectos del no cumplimiento con la auditoría obligatoria. Con una muestra de pymes españolas, una parte de las cuales está obligada a auditarse y otra está exenta, examinamos si la auditoría, tanto obligatoria como voluntaria, ayuda a la reducción del coste financiero. No encontramos una relación significativa entre la auditoría voluntaria y el coste financiero, mientras que las pymes que incumplen con el requisito de auditarse tienen un coste financiero mayor que las auditadas obligatoriamente. Ello sugiere que las diferencias en el coste financiero entre pymes auditadas y sin auditar están asociadas a un “castigo” para aquellas que evitan la auditoría obligatoria, en lugar de a una “recompensa” para las auditadas de modo voluntario. Entre las pymes auditadas, no encontramos que las auditadas por grandes auditores tengan un menor coste financiero.

Keywords:

• auditing
• cost of debt
• SMEs
• Spain
• JEL classification
• M42
• G32

Palabras clave:

• Auditoría
• Coste Financiero
• Pymes
• España

JEL clasificación:

• M42
• G32

Acknowledgements

We are grateful to Juan Manuel García Lara and two anonymous reviewers, to Emiliano Ruiz and the rest of participants at XV Meeting of Spanish Association of University Professors of Accounting (2012), to Salvador Carmona, Katerina Hellstrom, Jiri Novak and Aljosa Valentincic and to the participants at II Workshop on “Writing to Publish in International Accounting Journals” (2012). We are also grateful to Maria E. Rochina, from Department of Economic Structure at University of Valencia.

Notes

1. Companies below SAT are required to be audited in certain conditions (e.g. if 5% of the share capital demands it). However, SABI does not include information about the reason a company is audited. Therefore, we cannot state that companies audited below SAT are voluntarily audited.

2. The abbreviated balance sheet in force since 2008 breaks down the liabilities into several categories, depending on their nature (accounts payable, financing debt, provisions).

3. We calculate the financing debt as the sum of items and “short-term financing debt” and “long-term creditors” and assume that “long-term creditors” is all long-term financing debt, because SABI does not show which part of this item is not financing debt.

4. The data have been collected from the Spanish newspaper Expansión, which prepares a yearly list with the ranking of 40–50 top auditors in Spain, by total fees and audit fees.

5. COST_D and COV share a common component, finances expenses, which may induce a mechanic relationship. However, explanatory variables are lagged one period in relation to COST_D. Therefore, the inclusion of the lagged component alleviates this problem.

6. The results of Spanish thresholds’ regression are not the same as those reported in Section 4.1 for companies below SAT because now we only consider the current thresholds.