The impact of the external auditor and the external accountant on the quality of the financial statements of small- and medium-sized Belgian enterprises

Details

Supervisors

Sarens, Gerrit

Faculty

Louvain School of Management

Degree label

Master [120] en Ingénieur de gestion

Abstract

The primary objective of this paper is to investigate the impact of the external auditor and the external accountant on the level of discretionary accruals of small- and medium-sized Belgian enterprises that are not legally obliged to appoint an external auditor and an external accountant. There exist evidence on the positive impact of auditors on the quality of financial statements of the SMEs. However, to our knowledge, few investigate the impact of the external accountant on the quality of the financial statements. This matter is a key component to evaluate the complementarity of the work of the auditor and the accountant in the SMEs. Indeed, the external auditors sometimes represent a serious financial burden to the SMEs, leading the managers to replace the external audit function by the external accounting function. We argue that the external auditor and the external accountant are complementary and that sole the external accountant cannot replace the external auditor when it comes to assure the quality of financial statements. Our analyses are based on hand-collected data of 136 small- and medium-sized Belgian enterprises in 2011 and 2012. In Belgium, all the companies must report their financial statements on an annual basis. The database constituted with these pieces of information is an opportunity to examine financial accounting information of small- and medium-sized enterprises that are not legally obliged to appoint an external auditor and an external accountant. We use the approach of earnings accruals models to empirically analyze earnings management in small- and medium-sized Belgian enterprises. We apply a cross-sectional regression analysis as in Hribar and Collins (2002), Bartov, Gul, and Tsui (2000), Becker et al. (1998), DeFond and Jiambalvo (1994) and Teoh, Welch, and Wong (1998a); (1998b) in order to evaluate the level of discretionary accruals and the impact of the external auditor and the external accountant on that level. The results of our quantitative analysis support our first hypothesis suggesting that the external auditor has a positive impact on the quality of the SMEs’ financial statements. This outcome is consistent with the previous work of Duits (2012) and Willekens (2008), who show respectively that the external auditor has a positive effect on the perception of the stakeholders and on the quality of the financial statements. However, the results do not support our second hypothesis, and reveal that the external accountant has a negative impact on the quality of financial statements of Belgian SMEs. In the context of SMEs, the scientific community mostly acknowledges that the presence of an external accountant leads to several positive outcomes, such as performance, added value thanks to a specific expertise, and long term survival and growth. In contrast, our results reveal that the presence of an external accountant can bring negative repercussions on the quality of the financial statements. Low quality financial statements can eventually lead to lower performance as well as survival and growth issues on the long term.