Assessing financial reporting quality of family firms: The auditors׳ perspective☆

Abstract

We analyze audit fees and audit risk to extract auditors׳ assessment of family-firm׳s financial reporting quality. Relative to non-family firms, we find that auditors charge family firms significantly less, and the fee difference shrinks in magnitude when family firms have high audit risk. Using constructs for audit risk and audit effort, we show that family firms have lower audit risk, and that their auditors work less to provide assurance. Our findings suggest that superior reporting quality lowers audit risk and the need for greater audit investments, which is why auditors charge family firms less.