Private lenders' demand for audit

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

doi:10.1016/j.jacceco.2017.06.001

Private lenders' demand for audit

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

School of Accounting and Finance - Business School

Research output: Contribution to journal › Article (Academic Journal) › peer-review

27 Citations (Scopus)

250 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 language	English
Pages (from-to)	78-97
Number of pages	20
Journal	Journal of Accounting and Economics
Volume	64
Issue number	1
Early online date	9 Jun 2017
DOIs	https://doi.org/10.1016/j.jacceco.2017.06.001
Publication status	Published - Aug 2017

Research Groups and Themes

AF Financial Reporting

Keywords

Auditing
Financial reporting
Debt contracts

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10.1016/j.jacceco.2017.06.001

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This is the author accepted manuscript (AAM). The final published version (version of record) is available online via Elsevier at http://www.sciencedirect.com/science/article/pii/S0165410117300332. Please refer to any applicable terms of use of the publisher.
Accepted author manuscript, 708 KBLicence: CC BY-NC-ND

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Professor Mark A Clatworthy
- mark.clatworthybristol.acuk
- School of Accounting and Finance - Business School - Professor of Accounting
Person: Academic

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title = "Private lenders' demand for audit",

abstract = "We study clauses in private lending agreements requiring auditors to assure lenders of borrowers{\textquoteright} 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{\textquoteright} assets, the number of lenders and loan maturity. We provide novel evidence of the audit market enhancing efficient contracting.",

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author = "Richard Baylis and Peter Burnap and Mark Clatworthy and Mahmoud Gad and Christopher Pong",

year = "2017",

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language = "English",

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AU - Burnap, Peter

AU - Clatworthy, Mark

AU - Gad, Mahmoud

AU - Pong, Christopher

PY - 2017/8

Y1 - 2017/8

N2 - 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.

AB - 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.

KW - Auditing

KW - Financial reporting

KW - Debt contracts

U2 - 10.1016/j.jacceco.2017.06.001

DO - 10.1016/j.jacceco.2017.06.001

M3 - Article (Academic Journal)

SN - 0165-4101

VL - 64

SP - 78

EP - 97

JO - Journal of Accounting and Economics

JF - Journal of Accounting and Economics

IS - 1

ER -

Private lenders' demand for audit

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Professor Mark A Clatworthy

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