Initial Retention of External Accountants in Start-up Ventures

This study investigates the determinants of the initial retention of external accountants by new US startups. The authors test several arguments related to agency and credibility needs, financial activity and complexity, and accounting support and advice. Consistent with financial activity and complexity arguments, the authors find that intended scale and bank account activity are positively associated with both the actual and intended retention of an accountant. Comparing the decision to retain an accountant with the retention of another professional service, retaining a lawyer, the authors find many of the same factors to be significant. However, the authors find that lawyers are more likely to be retained during heightened uncertainty, primarily given the role of lawyers with patent and intellectual property assistance. Overall, these results suggest that some of the determinants of external accountant retention contrast with the determinants of internal accounting resource adoption, which are primarily related to decision-making needs and uncertainty.