Audit Process, Private Information, and Insider Trading

58 Pages Posted: 2 Nov 2018 Last revised: 17 Mar 2020

See all articles by Salman Arif

Salman Arif

University of Minnesota - Twin Cities - Carlson School of Management

John D. Kepler

Stanford Graduate School of Business

Joseph H. Schroeder

Indiana University - Kelley School of Business - Department of Accounting

Daniel J. Taylor

Wharton School, University of Pennsylvania

Date Written: March 14, 2020

Abstract

While the shareholder benefits of audits are well documented, evidence on whether audits can facilitate opportunistic behavior by corporate insiders is scarce. In this paper, we examine whether the audit process facilitate one particular form of opportunism: informed trading by corporate insiders. We focus our analysis on insider trading around the audit report date. We find an increase in trading around the audit report date and that the increase is abnormally large for firms that subsequently report modified opinions. Abnormal increase in trading is concentrated among officers and non-audit committee independent directors, and most pronounced in first-time modified opinions and modified opinions in years where financial results are subsequently restated. These trades are highly opportunistic: they predict restatements, and as a consequence, avoid significant losses. Collectively, our findings provide novel evidence that insiders appear to exploit private information about the audit process––a process ostensibly designed to protect shareholders––for opportunistic 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 (March 14, 2020). 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

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://https://carlsonschool.umn.edu/faculty/salman-arif

John Kepler

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
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)

Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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