Assurance Level Choice, CPA Fees, and Financial Reporting Benefits: Inferences from U.S. Private Firms

56 Pages Posted: 11 Aug 2017 Last revised: 14 Sep 2022

See all articles by Brad A. Badertscher

Brad A. Badertscher

University of Notre Dame

Jaewoo Kim

University of Oregon - Department of Accounting

William Kinney

University of Texas at Austin - McCombs School of Business

Edward Owens

University of Utah - David Eccles School of Business

Date Written: September 12, 2022

Abstract

Many U.S. private firms choose either a financial statement compilation or review rather than the higher assurance provided by an audit, yet little is known about these choices. We explore economic aspects of private firm choice of less-than-audit levels of assurance applied to GAAP-based financial statements. We find that CPA fees more than double for each increment in assurance. Commonly used financial reporting quality proxies are higher for both reviews and audits relative to compilations but are statistically indistinguishable on average between reviews and audits. Cost of debt is significantly lower for reviews than for compilations and significantly lower for audits than for reviews. Finally, we find that assurance level choices are associated with bank debt, trade credit, and potential internal information reliability and control concerns.

Keywords: assurance levels, audits, reviews, compilations, CPA fees, financial reporting quality, cost of debt

JEL Classification: G21, M41, M42, M48

Suggested Citation

Badertscher, Brad A. and Kim, Jaewoo and Kinney, William and Owens, Edward, Assurance Level Choice, CPA Fees, and Financial Reporting Benefits: Inferences from U.S. Private Firms (September 12, 2022). Journal of Accounting & Economics (JAE), Forthcoming, Simon Business School Working Paper No. FR 17-17, Available at SSRN: https://ssrn.com/abstract=3016422 or http://dx.doi.org/10.2139/ssrn.3016422

Brad A. Badertscher (Contact Author)

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Jaewoo Kim

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

William Kinney

University of Texas at Austin - McCombs School of Business ( email )

1 University Station B6400
Austin, TX 78712
United States

Edward Owens

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
8015815732 (Phone)

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