The abolition of the mandatory audit: Effects on Swedish small companies' credit-worthiness

Abstract

Background and problem: In November 2010, a new legislation for small limited companies regarding the abolition of the mandatory audit was introduced in Sweden with the intention to reduce their administrative burdens and make them more competitive. An audit ensures that the information presented in a company’s annual report is truthful and correct. This information is requested by a company’s stakeholders, who therefore could be affected by the abolition of the mandatory audit. Banks are an important stakeholder since they are one of the most important sources of funding for small companies. Whether and how they and a company’s credit-worthiness are affected has not fully been established so far. Purpose: The purpose of this thesis is to investigate whether and also how the new Swedish legislation regarding the abolition of the mandatory audit affects small limited companies’ credit-worthiness. Research question: How does the abolition of the mandatory audit affect the credit-worthiness of Swedish small limited companies, for those chosen not to have their reports audited? Methodology: This study is conducted with an inductive approach in order to, rather than verifying or rejecting a predetermined hypothesis, investigate the problem of possible effects on small companies’ credit-worthiness caused by the abolition of the mandatory audit. A qualitative method was used and the empirical material was gathered through semi-structured interviews with seven respondents from three of the largest banks within Sweden. Findings and conclusions: All respondents find the annual report important in their work with granting credit to companies. However, the value lies within the information provided, not whether it is audited or not. Reason to this is that several factors are important to consider when deciding a company’s credit-worthiness. The annual report is one factor, but also future repayment ability, prognoses, budgets and the personal characteristics of the company leader are important. The use of different information sources and the personal relationship with the company leader reduces the value of audit, according to the respondents. Overall, the credit-worthiness seem to be unaffected by the new legislation. However, all respondents state that they find the new legislation to have had a small impact, which could be a reason to the unchanged level of credit-worthiness.