Voluntary demand for internal and external auditing by family businesses

This study investigates voluntary demand for auditing by family businesses, a significant but relatively unexplored segment of the economy. The paper considers demand for both internal and external auditing by using survey da ta to investigate the impact of firm characteristics linked to the cost vs. benefit of engaging an auditor. Variables examined are firm size, debt, an d two agency proxies that measure separation of ownership and control, name ly, the proportion of nonfamily management in the firm, and the proportion of nonfamily representation on the board of directors. The paper also consi ders the association between internal and external auditing. Descriptive results on voluntary demand for auditing by 186 family business es revealed that internal audit was more prevalent than external audit, and outsourcing was a common method for providing internal audit. Results from logistic regression analyses provide support for the hypothesized impact o f the two agency proxies and firm debt on demand for external audit, but do not explain the demand for internal audit. For firms that voluntarily enga ged an auditor (internal and/or external audit), the negative and significa nt correlation between internal and external audit suggest that in the fami ly business environment they are more commonly viewed as substitute rather than complementary responses.