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    Rights statement: This is the author’s version of a work that was accepted for publication in Journal of Accounting and Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Accounting and Economics, 64, 1, 2017 DOI: 10.1016/j.jacceco.2017.06.001

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Private lenders’ demand for audit

Research output: Contribution to journalJournal article

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<mark>Journal publication date</mark>08/2017
<mark>Journal</mark>Journal of Accounting and Economics
Issue number1
Volume64
Number of pages20
Pages (from-to)78-97
Publication statusPublished
Early online date9/06/17
Original languageEnglish

Abstract

We study clauses in private lending agreements requiring auditors to assure lenders of borrowers’ compliance with financial covenants. Auditors are required under general purpose financial reporting to review covenant compliance. However, by informing lenders directly that they have no knowledge of default, auditors may increase their litigation risk. We find that auditor covenant compliance assurance clauses are significantly associated with more complex contractual adjustments to net income, the extent of reliance on accounting information in the contract, intangibility of borrowers’ assets, the number of lenders and loan maturity. We provide novel evidence of the audit market enhancing efficient contracting.

Bibliographic note

This is the author’s version of a work that was accepted for publication in Journal of Accounting and Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Accounting and Economics, 64, 1, 2017 DOI: 10.1016/j.jacceco.2017.06.001