Auditors and the Principal-Principal Agency Conflict in Family Controlled Firms

Family firms are widespread among public companies in France. In a recent paper, Ben Ali, Boubaker & Magnan, provide evidence that the presence of multiple large shareholders (MLS) beyond the largest controlling shareholder (LCS) mitigates the agency conflicts between large and minority shareholders, hence reducing the level of audit fees paid by family-controlled firms.

Using a sample of listed family-controlled firms in France over 2003–2013, their findings support the idea that auditors view MLS as performing a monitoring role over the controlling family, mitigating the potential for the extraction of private benefits by the LCS. More specifically, it appears that auditors expect MLS to mitigate the likelihood that LCS diverts corporate resources to the detriment of non-controlling shareholders.

By performing such a monitoring role, MLS reduce auditors’ risk exposure and, ultimately, lead them to reduce their efforts and fees. Auditors’ reactions to the presence of MLS are hence consistent with ISA 315 which requires auditors to assess the risks of financial misreporting through a better understanding of the entity being audited, especially in terms of its ownership and governance processes. 

The research of Chiraz Ben Ali, Sabri Boubaker & Michel Magnan.

Author(s)

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