FKMP AUDIT-WBES Draft 2.1

The Role of Firm-Specific Incentives and Country-Level Factors in the Voluntary Demand for Independent Audits* by Jere R. Francis, Inder K. Khurana, Xiumin Martin, and Raynolde Pereira College of Business University of Missouri-Columbia Columbia, MO 65211 USA Comments Welcome Please do not cite without permission First Version: February, 2004 Current Version: November 27, 2005 Contact Author Jere R. Francis Phone: 573-882-5156 e-mail: francis@missouri.edu *We appreciate the comments of Marlene Willekens and other conference participants at the 3rd European Audit Research Network Symposium, and comments of workshop participants at Hong Kong Poytechnic University and Université Paris Dauphine. The Role of Firm-Specific Incentives and Country Factors in the Voluntary Demand for Independent Audits ABSTRACT: Prior research characterizes independent external audits as a mechanism to monitor the performance of contracting parties, reduce information asymmetry and mitigate the firm’s agency problems. In this paper, we evaluate the importance of both firm-specific and endogenous country factors in explaining the voluntary demand for independent audits in an unregulated setting. Using a World Bank sample of 5,082 private firms from 62 widely diverse countries, we report three primary findings. First, we find that firm-specific incentives relating to agency costs and contracting are ...