Audit Process, Private Information, and Insider Trading

43 Pages Posted: 2 Nov 2018

See all articles by Salman Arif

Salman Arif

Indiana University - Kelley School of Business - Department of Accounting

John Kepler

University of Pennsylvania - Accounting Department

Joseph H. Schroeder

Indiana University - Kelley School of Business - Department of Accounting

Daniel J. Taylor

University of Pennsylvania - The Wharton School

Date Written: July 14, 2018

Abstract

Corporate insiders are typically aware of audit findings prior to the general public. We examine whether corporate insiders exploit this information advantage, and trade based on private information about audit findings. We focus our analysis on insider trading around the audit report date. We find a pronounced spike in insider trading in a short window around the audit report date; that audit reports containing a modified opinion trigger intense insider selling; and that abnormal levels of insider trading disappear shortly before the report is publicly disclosed. Highlighting the non-public nature of the audit findings at the time of the audit report date, we find no evidence of a capital market reaction around this date. Collectively, our results suggest insiders at multiple firms exploit features of the audit process for personal gain.

Keywords: audit opinions, audit process, audit report, private information, insider trading, opportunism

JEL Classification: G34, J33, K31, M52

Suggested Citation

Arif, Salman and Kepler, John and Schroeder, Joseph H. and Taylor, Daniel, Audit Process, Private Information, and Insider Trading (July 14, 2018). Kelley School of Business Research Paper No. 18-85. Available at SSRN: https://ssrn.com/abstract=3264424 or http://dx.doi.org/10.2139/ssrn.3264424

Salman Arif

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

John Kepler

University of Pennsylvania - Accounting Department ( email )

PA
United States

Joseph H. Schroeder

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Daniel Taylor (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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