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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Final published version
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
}
TY - JOUR
T1 - Private lenders’ demand for audit
AU - Baylis, Richard
AU - Burnap, Peter
AU - Clatworthy, Mark
AU - Gad Mahmoud, Mahmoud
AU - Pong, Christopher
N1 - 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
PY - 2017/8
Y1 - 2017/8
N2 - 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.
AB - 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.
KW - Auditing
KW - Financial reporting
KW - Debt contracts
U2 - 10.1016/j.jacceco.2017.06.001
DO - 10.1016/j.jacceco.2017.06.001
M3 - Journal article
VL - 64
SP - 78
EP - 97
JO - Journal of Accounting and Economics
JF - Journal of Accounting and Economics
SN - 0165-4101
IS - 1
ER -