Private lenders' demand for audit

Richard Baylis, Peter Burnap, Mark Clatworthy, Mahmoud Gad, Christopher Pong

Research output: Contribution to journalArticle (Academic Journal)peer-review

10 Citations (Scopus)
160 Downloads (Pure)

Abstract

We study clauses in private lending agreements requiring auditors to assure lenders of borrowers’ compliance with financial covenants. Auditors are required under general purpose financial reporting to review covenant compliance. However, by informing lenders directly that they have no knowledge of default, auditors may increase their litigation risk. We find that auditor covenant compliance assurance clauses are significantly associated with more complex contractual adjustments to net income, the extent of reliance on accounting information in the contract, intangibility of borrowers’ assets, the number of lenders and loan maturity. We provide novel evidence of the audit market enhancing efficient contracting.
Original languageEnglish
Pages (from-to)78-97
Number of pages20
JournalJournal of Accounting and Economics
Volume64
Issue number1
Early online date9 Jun 2017
DOIs
Publication statusPublished - Aug 2017

Keywords

  • Auditing
  • Financial reporting
  • Debt contracts

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