Assurance level choice, CPA fees, and financial reporting benefits: Inferences from U.S. private firms

Brad A. Badertscher, Jaewoo Kim, William R. Kinney and Edward Owens

Journal of Accounting and Economics, 2023, vol. 75, issue 2

Abstract: Many U.S. private firms choose either a financial statement compilation or review rather than the higher assurance provided by an audit, yet little is known about these choices. We explore economic aspects of private firm choice of less-than-audit levels of assurance applied to GAAP-based financial statements. We find that CPA fees more than double for each increment in assurance. Commonly used financial reporting quality proxies are higher for both reviews and audits relative to compilations but are statistically indistinguishable on average between reviews and audits. Cost of debt is significantly lower for reviews than for compilations and significantly lower for audits than for reviews. Finally, we find that assurance level choices are associated with bank debt, trade credit, and potential internal information reliability and control concerns.

Keywords: Assurance levels; Audits; Reviews; CPA fees; Financial reporting quality; Cost of debt (search for similar items in EconPapers)
JEL-codes: G21 M41 M42 M48 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:75:y:2023:i:2:s016541012200074x

DOI: 10.1016/j.jacceco.2022.101551

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