We examine the demand for audited financial statements in the context of deregulation. In 1994 a change in Canadian legislation eliminated a mandatory requirement for certain private companies to file audited financial statements.
The objective of this research was to determine the importance of factors that might influence whether the audit is discontinued. Information was obtained from the Cancorp Plus database and through a survey of companies affected by the change in legislation.
It was found that a large majority of the companies retained their audit. The strongest predictors of whether the audit would be retained were the prior existence of a lending agreement requiring audited financial statements and the level of audit fees. The likelihood of retention was positively related to the magnitude of fees, perhaps reflecting the perceived benefits of the audit. The existence of a lending agreement was found to be influenced by the ownership level of the entity's officers and directors. This study underlines the importance of audited financial statements to lenders.