We examine the effect of ownership structure on the demand for high quality auditors.

Prior literature indicates that the demand functions for auditors may be different in private companies than in public companies due in part to more significant agency costs for public companies.

Using data from publicly traded and privately owned banks of comparable size, we find that private banks are less likely to hire industry expert auditors than public banks, but are just as likely to hire non-expert Big 4 auditors.

Both private and public banks also pay higher audit fees for Big 4 and industry experts, but public banks pay an additional premium for industry experts.

Examining the effect of auditor choice on accruals quality, we find that both Big 4 and industry expert auditors are associated with less income increasing accruals in public banks, but have no effect on the accrual quality of private banks.

Overall, our findings suggest that the need to reduce agency costs is a larger driver of the demand for high quality auditors in public firms than in private firms.

By: Curtis M. Hall, Drexel University – Bennett S. LeBow College of Business, Benjamin W. Hoffman, Kent State University, and Zenghui Liu, Western Washington University – Accounting

You can find this SSRN paper here