Audit Process, Private Information, and Insider Trading

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