Audit Quality and Banks’ Assessment of Disclosed Accounting Information
Posted: 22 Apr 2013
Date Written: April 22, 2013
Abstract
The objective of this paper is to investigate whether banks view the information on the off-balance sheet liabilities (specifically, operating leases) disclosed in the notes to the financial statements as more reliable when it is audited by brand name auditors (i.e., a Big 4 audit firm). To the extent that banks assess a higher likelihood that the financial statements could have material misstatements if it is not audited by a Big 4 audit firm, they should charge a higher interest rate on private loans. Our findings suggest that the impact of operating leases on the interest rate is higher if the firm is audited by non-Big 4 audit firms.
Keywords: Operating leases, bank loans, audit quality, disclosure vs. recognition, loan interest rate
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