Business Commons^™

An organization’s demand for auditing is believed to be driven by regulation intended to protect third-party interests, especially those of shareholders and creditors. There is little agreement on what audit quality is. In this field study of private companies, we conduct interviews to learn about various sources of demand for audits, and criteria to assess their quality. Our study reveals several additional sources of unregulated demand from both internal agents (boards and employees) as well as external agents (customers, suppliers, bonding agencies, and other regulators). We also find that users assess audit quality based on auditor’s accounting expertise, presentation of …

The Public Company Accounting Oversight Board (PCAOB) in the U.S. regulates auditing and seeks to promote its quality, a difficult-to-define concept. To understand how agents involved in private companies think of audit quality, we interview their CFOs, auditors, bankers, board members, bonding agencies, and some private equity investors. We find that a variety of agents demand an audit while retaining their scepticism and seeking independent corroboration of what they learn from the audited financial statements. Management selects the auditor. Audit Quality is assessed based on the degree to which the audit plan (inputs and risk assessment processes) aligns with the …