20 February 2020

The cost of auditing differs significantly between companies, and depends on the form of ownership and the company’s bottom line. When annual reports are compiled, individuals can have a large influence on the reports and their contents. These are the conclusions of new research at LiU.

Linus Axén.
Linus Axén with his thesis, a few days after the disputation. Photo credit: Mikael Sönne

Four different articles

In his doctoral thesis Determinants of audit fees and the management of corporate disclosures, Linus Axén investigates several aspects of company auditing costs and the production of annual reports. He has examined limited companies, large listed companies and municipality-owned property companies, reviewing and comparing the reports. In several cases he has interviewed key personnel.

Linus Axén at the disputation.

The overall aim has been to determine which factors influence the auditing costs, and to increase our understanding of how listed companies manage information disclosure.

This compilation thesis consists of four articles, each of which presents an unambiguous result.

  • Both loss-making and profitable companies reduce auditing costs, but in different ways.

By investigating the auditing costs of 123 companies over a ten-year period, Linus Axén discovered that companies making a loss are more likely to act to reduce auditing costs from the previous year. This is probably because they are compelled to save money, and weigh all costs carefully.

Profitable companies, in contrast, often have higher nominal costs, but because of their size they have the possibility of reducing the relative price. This is probably partially the result of economies of scale, and the lower risk associated with profitable companies, which of itself reduces the need for auditing.

  • Municipality-owned property companies have lower auditing costs than privately owned ones.

The thesis compares 249 municipality-owned companies with 240 privately owned ones, and reveals a clear difference: the auditing costs for the municipality-owned companies are approximately 15 percent lower. This may be because municipality-owned companies have lower risks and carry out fewer acquisitions. It is also probable that the public procurement procedure helps to reduce auditing fees for public operations.

  • Company-specific information about internal auditing reduces the cost of external auditing.

Companies differ significantly in the amount of information they disclose about internal auditing. Only 15% of the 46 listed companies that were examined published company-specific information, while most published only general information.

The companies that disclosed detailed information had significantly lower costs for external auditing. This is probably because the internal control is stronger, and the need for external examination is thus lower.

  • Individuals have a large influence on the production of annual reports.

The thesis describes interviews with nine project managers in large listed companies about how they work when producing the annual report.  The procedures used are very diverse. Some project managers do most of the work themselves, while others delegate or purchase services. Some managing directors and boards of directors are highly involved and keep a close control, while others are significantly less active.

The thesis does not analyse the extent to which the final product – the published report – is influenced by these differences.

“It’s possible that the final report depends more on the individual than on the company. But we don’t know this yet. This is a topic for future research”, says Linus Axén.


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