Informal Competition And Demand For Audit

With the development of information technology,the informal economy has not only shrunk or even disappeared as expected,but has been continuing to expand.Informality is a form of existence for enterprises to avoid high administrative costs.Whether the unfair competitive advantage formed by informal economy will affect the decision of formal private enterprises is a topic worthy of our attention.At the same time,the private economy,as a component of China's total economic output of more than 90%,has been the focus of China's attention as the backbone of China's future economic development.Therefore,this paper looks at two major existing economic forces-the informal economy and the formal private economy-to find the interaction between them.By exploring the interaction between economic forms,it not only helps us understand the macro-level influence factors in the process of formal economic development,but also helps us to clarify the future development orientation of the informal economy.Auditing as an important way of corporate governance mechanism is a discretionary decision of unlisted private enterprises in China.When private enterprises operate in the informal competitive environment,they are likely to respond to the informal competition by changing the choice of audit.So this paper focuses on whether the informal competition will have a significant impact on the audit decisions of formal private enterprises.This paper analyzes the impact of informal competition on the demand for audit of annual financial statements of formal private enterprises based on the survey results of the World Bank questionnaire,which is aimed at Chinese unlisted manufacturing enterprises.The auditing demands of an enterprise can be divided into two levels:external auditing demands and internal auditing demands.The external auditing demands are mainly caused by the information asymmetry caused by the separation of owners and operators,which will have a driving force on the enterprise's auditing choice;while the internal auditing demands are mainly generated by the internal management of the enterprise based on the business management and decision-making.And internal managers as the ultimate decision makers of enterprises'audit demands,so internal audit demands are the ultimate decisive force for corporate auditing demands.This paper dialectically analyzes the impact of informal competition from the external audit demands and internal audit demands on the demand for audit.Then further explore the important factors that affect the relationship between informal competition and auditing demands,including tax regulation and legal protection.The study found that when formal enterprises face strong informal competition,their demand for the audit of annual financial statements will be significantly reduced.This result is not in line with the expectation of the three classical theories of auditing demands,which include agency theory,information theory and insurance theory.This paper finds that for Chinese unlisted private enterprises,the privatization of the nature of equity and the highly concentrated ownership structure lead to agency demand and information demand is not significant,the lack of legal protection leads to the audit insurance mechanism is not strong.This paper argues that the choice of companies to reduce audit demands is mainly based on economic decisions made by the considerations of cost-saving motivations and earnings management motivations.Further research finds that tax cost is one of the most important reasons driving the information confidentiality motivation,and good legal protection can weaken this effect.After adopting substitutional variables,instrumental variables,and propensity score matching(PSM)to get over endogenous problems,the conclusions of this paper are still stable.This paper studies the problem of the informal economy from the perspective of demand for audit,not only expands the research on the microeconomic consequences of the informal economy,but also provides a new perspective for the study of the informal economy.It also examines the voluntary demand for audit of unlisted private companies,which has enriched the relevant research on demand for audit.