Private Lenders’ Demand for Audit
Journal of Accounting and Economics (Forthcoming)
Posted: 30 Mar 2015 Last revised: 14 Jun 2017
Date Written: April 16, 2017
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.
Keywords: Auditing; financial reporting; debt contracts
JEL Classification: M41, M44, M49
Suggested Citation: Suggested Citation