Financial Reporting Choices of U.S. Private Firms: Large-Sample Analysis of GAAP and Audit Use
University of Illinois at Urbana-Champaign - Department of Accountancy; Norwegian Center for Taxation; Massachusetts Institute of Technology (MIT) - Sloan School of Management
University of Chicago - Booth School of Business
December 17, 2013
Chicago Booth Research Paper No. 14-01
We examine the financial statement production of privately held U.S. firms using a comprehensive panel dataset of all tax returns from firms with more than $10 million in assets during the years 2008 to 2010. We find that more than 60% of these firms — controlling nearly $4 trillion in assets in 2010 — do not prepare audited GAAP financial statements. In contrast to recent assertions, the rate of audited GAAP financial statement production is remarkably persistent at both the population and firm levels over our time horizon. For firms that do switch, we find that producing audited GAAP financial statements is associated with characteristics of growth opportunities — young, high-growth, loss-making firms with intangible assets and expanding ownership — while the termination of audited GAAP statements is associated with financial distress. Firms raising new capital without an audit are typically mature, profitable firms with tangible assets. Collectively, our findings offer new insights to researchers and regulators about audited GAAP financial statement production and its role in the capital formation of privately held U.S. firms, an economically massive setting undergoing significant financial reporting change.
Number of Pages in PDF File: 62
Keywords: audit, private firms, accounting choice, financial reporting, capital formation
JEL Classification: M41, M44, M49
Date posted: January 9, 2014 ; Last revised: January 14, 2014
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