The impact of statutory audit exemption thresholds to financial information quality: Evidence from Finland, United Kingdom and Denmark

Abstract

In the European Union statutory audit function currently has problems as re-gards lack of uniformity, this has resulted a need for harmonize the auditing standards. The European Commission has set directive which allows EU mem-ber states to significantly increase the statutory audit exemption thresholds. It is argued that increasing these thresholds could lead to lower financial information quality. In this context, the present research aims to establish the relationship between auditing and the quality of financial information. Following the common practice in the research area, the quality of financial information is measured by the magnitude of earnings management. Discretionary accounting accruals are estimated by modified Jones model and used as a substitute for earnings management.

The validity of hypothesis is examined on the final sample of 9750 private com-panies in three European countries from the year 2008. The study contains un-ivariate and multivariate analysis in order to obtain relevant amount of evi-dence does auditing restricts the use of discretionary accruals. In addition, to control for differences in earnings management incentives the other variables are selected in accordance with the frequently similar studies. The results of univariate and multivariate analyses reveal no evidence that auditing signifi-cantly restricts the use of earnings management.