The eff ect of introducing voluntary audit on accounting quality and firm behaviour : an empirical study of small Norwegian firms

Auditors play an important role by ensuring that the rm's external stakeholders base their decisions on information subject to adequate controls. In this study, we explore the e ffects the option of voluntary audit has had on small firms' accounting quality and behaviour. We use a detailed data set on all businesses in Norway gathered by the Norwegian Tax Authorities. We present quasi-experimental evidence showing the negative causal e ect opting out of audit has on accounting quality, and clear evidence of behavioural eff ects in the form of bunching below the revenue threshold for voluntary audit. Our findings suggest that the option of voluntary audit has led to an increased risk of external stakeholders basing their decisions on lower quality information. Evidence of bunching behaviour indicates that fi rms bunch by either exercising earnings management activities or reducing output.