Presenter: Sam Damsgaard Enemark, AU

Title: Extended review: An alternative to audit for SMEs?

Abstract: Regulators and practitioners are concerned about imposing mandatory audit for SMEs. They fear that the cost incurred by the auditees, when undergoing audit, may not be justifiable, since their shareholders have lower demand for high financial reporting quality. As a result, three approaches to exempt SMEs from auditing have been adopted worldwide: (i) A complete exemption from assurance engagements, (ii) voluntary audit and (iii) specialised assurance engagements as a replacement. In this paper I seek to investigate the ability by the auditor to restrict earnings management when conducting extended review: A specialised assurance engagement for SMEs, which is less comprehensive than audit in terms of evidence collected. After controlling for cofounding factors using a unique population-based dataset, I find companies, that undergo extended review, have significantly lower financial reporting quality proxied by discretionary accruals and propensity to report a small profit, compared to companies that undergo audit. Further, I find evidence suggesting that auditors are better at restricting income-increasing earnings management when performing audit relative to extended review. This is consistent with the theory of auditors’ asymmetric loss function. My findings are robust to the Heckman self-selection model, the instrumental variables estimator, and propensity score matching.

PhD presentation as part of mandatory 1st or 3rd year presentation. The time is extended to one hour; the presenter has 40 minutes for the presentation, 5-10 minutes for the discussant, and 5-10 minutes for questions.

Organizers: Stefan Hirth and Anders Merrild Posselt