The Impact of Voluntary Audits and Governance Characteristics on Accounting Errors in Private Companies

This paper examines the extent to which the audit and corporate governance characteristics of UK private companies are associated with defective accounting information. Despite the economic importance of private firms, relatively little is known about their financial reporting and governance characteristics. Using a large sample of UK private companies, we examine the effects of voluntary audit, board gender balance and financial expertise on the likelihood of errors occurring in published annual accounts. Our results indicate that audited accounts are approximately half as likely as unaudited accounts to contain errors. In addition to contributing to recent academic research in this field, our findings are likely to be of interest to policy makers, who are considering exempting more firms from mandatory audit. We also find that gender diversity among board members is positively associated with accuracy of accounting information, though our primary measure of directors' financial expertise has no significant effect. Our findings are robust to the employment of two-step endogeneity models, matching and Rosenbaum bounds for confounding variables and rare event logit estimators