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Private lenders' demand for audit

Research output: Contribution to journalArticle

Original languageEnglish
Pages (from-to)78-97
Number of pages20
JournalJournal of Accounting and Economics
Volume64
Early online date9 Jun 2017
DOIs
DateAccepted/In press - 6 Jun 2017
DateE-pub ahead of print - 9 Jun 2017
DatePublished (current) - Aug 2017

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.

    Research areas

  • Auditing, Financial reporting, Debt contracts

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  • Full-text PDF (accepted author manuscript)

    Rights statement: This is the author accepted manuscript (AAM). The final published version (version of record) is available online via Elsevier at http://www.sciencedirect.com/science/article/pii/S0165410117300332. Please refer to any applicable terms of use of the publisher.

    Accepted author manuscript, 707 KB, PDF-document

    Licence: CC BY-NC-ND

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