Auditing private firms in a civil law context: an exploratory analysis of the impact on form and substance quality

This study examines to what extent auditors increase financial reporting quality in a civil law private firm context. Although such context provides little incentives to focus on financial reporting quality, the signalling role remains important. Therefore, we argue that auditors will also increase the quality of the financial statements in this context but will primarily focus on the form quality of the statements (i.e., the extent to which the required disclosures are made) while the substance quality (i.e., the extent to which the financial statements faithfully represent the economic reality) might become a smaller concern. A new measure for form quality is developed, and two matched samples of 278 and 316 Belgian private firms respectively are used to test our hypotheses. Our results confirm that having an auditor significantly increases the form quality of the financial statements while the effect on substance quality is more ambiguous.