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The Value of Auditor Verification Amid Economic Uncertainty: International Evidence from Small Businesses

Xi Ai Chenxi Lin Nathan J. Newton
Auditing: A Journal of Practice and Theory. November 4, 2023

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We examine the value of auditor verification to small businesses when they face economic uncertainty. The COVID-19 pandemic was a significant, exogenous economic shock that immediately heightened the need for external funding for many companies. Using a sample of small, private companies from 21 countries, we examine how the receipt of an audit prior to the pandemic affects the primary type of financing companies obtain during the pandemic. We find that companies with audited financial statements available are more inclined to secure primary funding from bank loans rather than from equity contributions from existing owners or new investors. However, an audit is not associated with primary funding from government sources. We also document that businesses benefit most from an audit when information asymmetry and economic disruption are relatively high and when the supply of government liquidity support is relatively low.