Why Do Owner-Managers of Micro-Companies Opt for Voluntary Audits? The Importance of Debt Providers’ versus Entrepreneurs’ Needs

This study investigates the extent to which the pressures from outside stakeholders, specifically the providers of debt and trade credit, as opposed to owner-managers' internal needs explain the use of voluntary audits in micro-companies. Whereas previous studies have mainly focused on how bank debt affects the demand for voluntary audit in small and medium-sized enterprises (SMEs), micro-companies have largely been overlooked in related prior literature. Using a sample of some 50,000 Finnish micro-companies over the period 2008-2010, we find that voluntary audit is expectedly more likely in micro-companies which have above average levels of trade credit or bank finance than those relying on owner's equity. Surprisingly, the results also indicate that a very significant proportion of companies (26 percent) relying on owner's equity only also choose voluntary audit. Interview data provide insights into the reasons hereof and confirm the benefits of audit in reducing control risk and business risk for management