Role of Auditing and Audit Quality in Mitigating Agency Problems in Private Family Firms (R-5519)

Academics have given little attention to accounting practices in family firms, being the majority of firms worldwide. Yet, it can be assumed that the purpose of accounting takes on a special meaning when ownership is concentrated in the hands of a founding and controlling family. In this research, we want to focus on the almost unresearched domain of audit quality in private family firms. The main objective is to examine the role of auditing in mitigating specific agency problems in private family firms, while taking into account their heterogeneity. The monitoring role of auditors is considered as crucial to protect the stakeholder's interests when a firm copes with agency problems. Even though this topic is extensively studied in listed firms, empirical research is virtually nonexistent in private family firms while these firms may cope with even more agency problems due to possible negative effects of self-control and parental altruism (e.g. hiring son or daughter even though they lack the necessary competences to lead the firm). Moreover, we argue that even though some categories of private family firms cope with higher agency problems and are in need of a (high quality) auditor, the actual appointment may depend on the effectiveness of the board of directors. A well composed and well functioning active board may improve the appointment of (high quality) auditors if agency problems prevail.

Keywords:agency theory, Audit, Family firms

Disciplines:Business administration and accounting