Auditor Communication Provisions in Private Loan Agreements: Do They Matter?

Research output: Contribution to journalArticlepeer-review

Abstract

We examine auditor communication provisions (ACPs) in private loan agreements, which are private contracting mechanisms establishing communication between lenders and their borrowers’ auditors. We provide evidence that lenders value auditor communications and often specify different types of ACPs that facilitate lender monitoring. With predictable variation across the different ACP types, ACPs are associated with larger loans, longer maturities, larger loan syndicates, more financial covenants, and greater slack in financial covenants. In examining audit effort implications for borrowers, we find that ACPs are associated with higher audit fees and longer audit report lags. This is consistent with auditors responding to the litigation risk ACPs impose. In samples where the risk of third-party litigation is greater, the association between ACPs and audit effort proxies is heightened, suggesting the increased litigation risk brought about by ACPs interacts with other audit client-specific risk factors.

Original languageEnglish (US)
Pages (from-to)77-105
Number of pages29
JournalAuditing
Volume43
Issue number3
DOIs
StatePublished - Aug 2024
Externally publishedYes

Keywords

  • audit fees
  • auditor communication provisions
  • auditor litigation risk
  • information asymmetry
  • loan agreements

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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