The Demand for Voluntary Audit in Micro‐Companies: Evidence from Finland

• Author: Jill Collis,Juha Kinnunen,Hannu Ojala,Lasse Niemi,Pontus Troberg
• DOI: http://doi.org/10.1111/ijau.12070
• Date: 01 November 2016
• Published date: 01 November 2016

The Demand for Voluntary Audit in Micro-Companies: Evidence from Finland

Hannu Ojala,

1,2

Jill Collis,

3

Juha Kinnunen,

2

Lasse Niemi

2

and Pontus Troberg

4

1

University of Tampere

2

Aalto UniversitySchool of Business, Helsinki

3

Brunel University London

4

Hanken School of Economics, Helsinki

The purpose of this study is to uncover additional determinants of the demand for voluntary audit in micro-

companies by investigating the internal management factors that have not yet been explored in prior literature. The

hypotheses are developed from the literature and interviews with owner-managers of such companies, bank lenders

and the tax authority. The study is based on archival data relating to some 50,000 Finnish micro-companies over the

three-yearperiod following the introductionof audit exemption in 2008.Our results show that the driversof voluntary

audit are: (1) management needs to ensure security of supply from trade creditors, (2) the company is not in financial

distress, (3) the company is growing, (4) management has a need for tax reporting credibility, and (5) ownership is

dispersed. The results of this research will be of interest to the owners and managers of micro-companies, as well as

the accounting and auditing profession.

Key words: Audit theory, external audit, regulation

INTRODUCTION

The purpose of this study is to uncover additional

determinants of the demand for voluntary audit in

micro-companies by investigating the internal

management factors that have not yet been explored in

the literature. Micro-companies are not only of economic

importance to the many small and medium-sized

accounting practices that service their needs, but they are

also important at the macro level. In the EU, for example,

they represent 92 per cent of the business population and

provide 29 per cent of jobs (EC, 2013, p. 10). Together with

small and medium-sized companies, they are considered

‘key to ensuring economic growth, innovation, job

creation, and social integration’(EC, 2015). Our study is

also set in the wider context of the debate over reducing

administrative burdens for micro-entities under the new

Accounting Directive (Directive 2013/34/EU), which

affects some 5.3 million micro-companies (75 per cent of

reporting entities) in the EU. To a large extent, the debate

focuses on the dearth of empirical research evidence on

the benefits of regulation, which are much harder to

measure than the costs (ICAEW, 2015).

Given the optionto forgo the audit, the question arisesas

to why some micro-companies see sufficient benefits in

having an external audit once it becomes voluntary. A

number of previous studies have examined the demand

for voluntary audit in small companies (e.g., Seow, 2001;

Rennie et al., 2003; Collis, Jarvis, & Skerratt, 2004; Hay &

Davis, 2004; Allee & Yohn, 2009; Collis, 2010; Kim et al.,

2011; Lennox & Pittman, 2011; Minnis, 2011; Dedman &

Kausar, 2012; Niemi et al., 2012; Dedman, Kausar, &

Lennox, 2014). In addition, Collis (2012) investigated the

demand for voluntary audit among micro-companies in

the UK that fell below the maximum EU size thresholds

for micro-entities. However, we arenot aware of any study

based on a large sample that has examined the drivers of

voluntary audit in very small micro-companies.

1

In view

of the importance of micro -entities in the European

economy, we add to the literature by identifying additional

drivers of voluntary audit not examined by Collis (2012).

The main reason for the lack of large-sample studies is the

difficulty in obtaining data, as few countries collect and

publish detailed financial data for these very small

companies. It can also be argued that the move towards

regulatory relaxation for smaller entities in many

jurisdictions exacerbates this problem (ICAEW, 2015).

Since 1994, EU Member States have been able to offer

audit exemptionto qualifying small companies. In general,

a non-publicly accountable company must satisfy two of

the three sizetests for a small company for two consecutive

years. The current thresholds for a small company are

shown in Table 1. By the end of 2010, all 27 Member States

had done so, using the EU maxima or a lower national

level, thus allowing companies a choice: to forgo an

independent audit of their financial statements or opt for

a voluntary audit.This study is set in Finland, where audit

exemption was not introduced until 2008 and, even then, it

was only availablefor very small micro-companies. Table1

also shows the very low thresholds applicable in Finland

and includes the thresholds for the new EU category of

micro-entity (EC, 2013) by way of comparison.

Finland makes a suitable institutional setting for the

study due to the availability of detailed data. With the

exception of the cash flow statement, which is only

required for companies exceeding certain size tests,

2

all

companies file a full set of financial statements with the

tax authority. This information is subsequently transferred

to the public record, thus fulfilling financial reporting

requirements. The public record provides access to

financial statements and taxable income of limited liability

companies and, arguably, increases the reliability of

financial information from micro-companies.

Weanalyse both quantitative and qualitative data in this

study.

3

The qualitative data was collected via 20 semi-

structured interviews conducted in 2012

4

:

•16 interviews with the owner-managers of micro-

companies in a range of business sectors that included

architecture,digital media,healthcare education, interior

design and restaurants

Correspondence to: Dr Jill Collis, Brunel University London, Kingston

Lane, UxbridgeUB8 3PH, UK. Email: jill.collis@brunel.ac.uk

International Journal of Auditing doi: 10.1111/ijau.12070

Int. J. Audit. 20:267–277(2016)

©2016 John Wiley& Sons Ltd ISSN 1090-6738