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
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: Suggested Citation