Access to educated workforce and the choice of external audit: international evidence from small and medium enterprises

Abstract

Purpose

This study aims to document the effect of educated workforce on the decision of small and medium enterprises (SMEs) to use external auditors to verify their financial statements.

Design/methodology/approach

This paper uses the probit regression models and the data from 141 developing countries to test the arguments presented in this paper. The data is provided by the World Bank’s Enterprise Surveys and is collected during the period between 2006 and 2020.

Findings

The paper shows that SMEs with inadequate access to educated workforce are more likely to use external auditors to verify their financial statements. The findings are robust to the comprehensive inclusion of relevant controls and to a number of sensitivity tests. The sensitivity tests include dividing samples based on SME’s size, country’s gross domestic product and country’s location. The results also remain qualitatively the same after correcting for potential endogeneity concerns. Furthermore, the paper shows that the relationship between access to educated workforce and the choice of external audit is moderated by several SME-specific characteristics, such as its size, ownership concentration, managerial experience and tax-related problems.

Originality/value

This is an initial attempt to highlight the role played by the quality of workforce on the choice of external audit among SMEs in an international context. Most of prior literature on this topic focuses on the publicly listed firms.

Citation

Farooq, O. and Bakhadirov, M. (2022), "Access to educated workforce and the choice of external audit: international evidence from small and medium enterprises", Journal of Financial Reporting and Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFRA-02-2022-0051