Drivers of voluntary audit in Finland: to be or not to be audited?

This paper examines factors affecting the owner-manager's voluntary decision to hire an auditor in small firms. Using a random sample of 412 small private companies in Finland responding to an Internet survey, we first probe the institutional boundaries of a prior UK study [Collis, J., Jarvis, R., and Skerratt, L., 2004. The demand for the audit in small companies in the UK. Accounting and business research , 34 (2), 87--100] and conclude that its main findings can be generalised to a different regulatory setting (Finland) typical of many Continental European countries. Second, we broaden the prior research by testing new hypotheses regarding the drivers of an audit among small companies. We hypothesise and find evidence that outsourcing of critical accounting functions creates information asymmetry between the owner-manager and the external accountant, which may arouse the need for monitoring the external accountant through a voluntary audit. In addition, we find, as hypothesised, that tax advisory services provided by the external accountant reduce the likelihood of a voluntary audit. Moreover, we hypothesise that receiving a qualified opinion from the auditor reduces the likelihood of hiring an auditor voluntarily, whereas firms experiencing financial distress would be more willing to have their financial statements audited. We find evidence consistent with these hypotheses.