Private Lenders’ Demand for Audit

Journal of Accounting and Economics (Forthcoming)

Posted: 30 Mar 2015 Last revised: 14 Jun 2017

See all articles by Richard Baylis

Richard Baylis

Cardiff Business School

Pete Burnap

Cardiff University

Mark Clatworthy

University of Bristol, Department of Accounting and Finance

Mahmoud Gad

Lancaster University - Lancaster University Management School

Christopher K. M. Pong

Heriot-Watt University - School of Management and Languages

Date Written: April 16, 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.

Keywords: Auditing; financial reporting; debt contracts

JEL Classification: M41, M44, M49

Suggested Citation

Baylis, Richard and Burnap, Pete and Clatworthy, Mark A. and Gad, Mahmoud and Pong, Christopher K.M., Private Lenders’ Demand for Audit (April 16, 2017). Journal of Accounting and Economics (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2557618 or http://dx.doi.org/10.2139/ssrn.2557618

Richard Baylis

Cardiff Business School ( email )

Cardiff CF10 3EU
United Kingdom

Pete Burnap

Cardiff University ( email )

Aberconway Building
Colum Drive
Cardiff, Wales CF10 3EU
United Kingdom

Mark A. Clatworthy (Contact Author)

University of Bristol, Department of Accounting and Finance ( email )

School of Economics, Finance and Management
8 Woodland Road
Bristol, BS8 1TN
United Kingdom
+44(0)1173310914 (Phone)

Mahmoud Gad

Lancaster University - Lancaster University Management School ( email )

Accounting and Finance Department,
LUMS,
Bailrigg Lancaster, LA1 4YX
United Kingdom

Christopher K.M. Pong

Heriot-Watt University - School of Management and Languages ( email )

Edinburgh EH14 4AS, Scotland
United Kingdom

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