英文论文润色 审计账户在维持代理关系中的重要性
We find the negative relationship exists between the levels of statutory disclosure and the credit ratings. If full accounts were filed by small private companies, their credit rating can be improved. This suggests that statutory audited accounts reduce the cost of debt.
The remainder of the paper is structured as follows. Section 2 reviews relevant literature and develop the hypotheses. Section 3 introduces the methodology. Section 4 presents and analyses the results. Section 5 draws conclusions and limitation of the study.
2. Literature review and development of hypotheses
2.1 The history of disclosure in the UK
2.2 The role of disclosure in capital markets
In capital markets, the information problems and agency problems based on information asymmetry hinder the resources to efficiently distribute in the capital market economy. To solve or mitigate the above problems, disclosure itself and institutions which establish reliable disclosure between investors and managers play a key role. As Healy and Palepu (2005) mentioned, the optimal allocation of deposit money to the investment opportunity is a decisive challenge in capital economy. There are many existing entities and fresh companies like to attract and absorb the public savings, which is traditionally in the bank or in the investment institution, to fund their business methods. Similarly, savers also want to invest their free monetary to companies for the interests and dividends. While entrepreneurs and savers would like to do business with each other, the suitable savings to the matching investment opportunities are complex mainly for two problems. One is the "information problem" faced by savers who make investment venture because firm managers usually hold more and better information than savers relate to the value of investment opportunities and managers have motion to overstate the true value of their companies. The other one is the "agency problem" between investors and managers as their savings could be confiscated by entrepreneurs for information asymmetry (Healy and Palepu 2005).
2.2.1 Information problem
The information problem or called "lemons problem" is generated from the differences of information holding by investors and entrepreneurs and inconsistent intentions between them. According to Akerlof (1970), this problem could lead to a failure of effective capital markets. Based on the premise which is both investors and entrepreneurs are rational and they evaluate investment opportunities by their own information, the concise description of this problem is stated that under information asymmetry circumstance, entrepreneurs with bad ideas can claim that their ideas as valuable as good ideas to investors; therefore, when investors value a investment opportunity, they will possibly both good one and bad one as an average level. The consequence is that the capital market will then undervalue some good investment opportunities but overvalue some bad ones relied on the available information of entrepreneurs. The investors who invest the bad ideas but miss good ones are call "lemons" (Akerlof 1970).
There are several solutions to information problem. Kreps (1990) argued that the optimal contracts between investors and entrepreneurs will serve motivation of full disclosure of private information, which can reduce the problem from overvaluation and undervaluation. Healy and Palepu (2005) mentioned that the regulation requiring statutory full disclosure and intermediaries like financial analysts and credit rating agencies who can engage in superior information production are also useful potential solutions to mitigate the information problems.
2.2.2 Agency problem
2.3 Agency factors
Agency problem between principals and management arises from information asymmetry. The rationale of agency relationship is traditionally present in large firms where the external shareholders exist and the audited financial accounts play an agency role in this relationship between shareholders and managers (Jensen and Meckling 1976). The main users of audited financial accounts are the tax authorities, lender, employees and major suppliers and customers apart from the owners (Collis 2003). In small companies, a principal is the one who is away from the management actions, including an internal or external shareholder who cannot verify the information, a lender or other provider of credit (Power 1997).
Power (1997) also contended that information asymmetry may be found among internal shareholders once they are short of essential knowledge to understand financial information. Therefore, requirement for the audit are not related to the company size since agency relationships are present in either large companies or small companies. With economic rationality (Weber 1968), Freedman and Goodwin (1993) argued that the conflict between shareholders and managers even exists the extremely small firms and the full, audited accounts are considered as a necessary protection. However, there are some evidences which indicate that small companies are likely own-managed rather than external-owned (Carsberg et al. 1985). Thus, the audit could be little valued in small firms because in which there are less agency problems than large companies where ownership is separate from control.
Prior research shows that the audited financial accounts play a crucial role in lending decisions made by banks (Berry et al. 1987, Deakins and Hussain 1994). Page (1984) studied how the managers pay attention to the benefit of statutory audit for bank lending and the result shows that 17% of respondents would like to audit fully their accounts in order to be good for the external users especially banks. Lin-Seouw (2001) studied the same topic after legislation of audit exemption first using in the UK in 1994 also obtained the similar conclusion. In ACCA (1998) document, an interview to 17 bankers shows that 94% of them would more like to lend money to the fully audited small companies; and 82% of companies whose turnover size is between £350,000 and £1.5m think public disclosure information of audit can help for the bank.
Morris and Omrod (1990) based on a investigation of credit analysts and credit managers, discovered that if small companies chose to file statutory full financial accounts, the audit could become the very important evidence to access credit risk. By contrast, this study also found that if abbreviated accounts were filed by small companies, the cost was high since about half of the information omitted from the accounts could be collected from other sources. Furthermore, companies who filed full accounts can improve their credit ratings (Collis 2003), which means voluntary full accounts can bring down the cost of capital. Meanwhile, the independent audit could reduce inherent risk and control risk whose are usually on the high level in small firms (Collis et al. 2004).
Previous study indicates that the cost of agency problem could proportionally increase with the size and complex level of the firm (Ettredge et al. 1994). In the contrary, the cost of the simple public disclosure and audit can decrease disproportionately on small firms, particularly when the reporting hardly is provided to the outside users (Keasey et al. 1988). Therefore, the agency costs are less regarded in the small companies as the agency relationships are less significant as well as there are less complexity than large firms. This statement looks logical as the description of DTI (1999) is that the smaller company holds proportionately greater costs of audit.
An agency justification in connection with lending is supported by a study of the
voluntary audit decision made by large quoted US companies in 1926 prior to the audit
becoming a statutory requirement (Chow, 1982). The results show that leverage, and to a
lesser extent size, were significant factors. In this study, leverage was used as a proxy for
the use of accounting numbers in debt covenants, rather than for an agency demand for
the accounts to be audited. In contrast, more recent evidence (Ettredge et al., 1994)
indicates that leverage is not significant in explaining the demand for quarterly reviews
prior to filing with the SEC. This suggests that leverage is a noisy proxy for the agency
demand for the accounts to be audited. This notion is supported by Dichev and Skinner
(2002), who report that leverage is used in other studies for a different purpose: namely,
the closeness of a company to the constraints specified by the debt covenants.
8).
From this review, it would appear that considerable reliance is placed on the audited
accounts of small companies in maintaining agency relationships. Yet the government's
case for limiting or eliminating the requirement for the small company audit appears to
have been motivated solely by the desire to reduce cost burdens.
英文论文润色 审计账户在维持代理关系中的重要性
