Voluntary Audit’s Effect on Earnings Management : A Quantitative Study on Micro Enterprises in Sweden

Sammanfattning

The importance of credibility in the process of financial reporting helps build stake holders'trust; however, micro-enterprises often lack the governance mechanisms of larger firms, which can result in higher rates of earnings manipulation. Following the audit reform which made audit voluntary for micro-enterprises in Sweden in 2010; the effect of voluntary audit on earnings management in the country will be studied with particular attention paid to geographical and COVID-19 effects. A large scaled dataset using firm year data comprising more than one million companies from 2015 through 2023 will be utilized for analyzing the impact of voluntary audit engagement on the rate of discretionary accruals by implementing fixed-effect regression analysis. In this way, it will be demonstrated that voluntary audit does have an effect on earnings management, thus, acting as a governance mechanism. However, its effect is economically small and highlydependent on model selection. Additional findings suggest that geographic differences between urban and rural firms are nolonger evident once firm-level attributes are controlled for, indicating the greater relevance offirm-level factors as compared to their external institutional environment. On the other hand, the efficiency of voluntary audit drops considerably after the COVID-19 pandemic, indicatingthat macroeconomic uncertainty influences managerial incentives and makes audit less effective in its monitoring role. In conclusion, the research illustrates that voluntary audit is a contextual type of governance which becomes efficient in particular conditions, determined by firm-level features and economic conditions, and is thus not always an effective way to constrain earnings management. These findings help fill the gap in literature concerning the nature of voluntary auditing in microenterprises, going beyond purely technical considerations.