Audit process, private information, and insider trading

Salman Arif (), John D. Kepler (), Joseph Schroeder () and Daniel Taylor ()
Additional contact information
Salman Arif: University of Minnesota
John D. Kepler: Stanford University
Joseph Schroeder: Indiana University
Daniel Taylor: University of Pennsylvania

Review of Accounting Studies, 2022, vol. 27, issue 3, No 10, 1125-1156

Abstract: Abstract While the shareholder benefits of audits are well documented, evidence on whether audits can facilitate opportunistic behavior by corporate insiders is scarce. In this paper, we examine whether the audit process facilitates one particular form of opportunism: informed trading by corporate insiders. We focus our analysis on insider trading around the audit report date. We find an increase in trading around the audit report date and that the increase is abnormally large for firms that subsequently report modified opinions. The abnormal increase in trading is concentrated among officers and non-audit committee independent directors, and most pronounced in first-time modified opinions and modified opinions in years where financial results are subsequently restated. These trades are highly opportunistic: they predict restatements, and as a consequence, we show they avoid significant losses. Collectively, our findings provide novel evidence that insiders appear to exploit private information about the audit process––a process ostensibly designed to protect shareholders––for opportunistic gain.

Keywords: Audit opinions; Audit process; Audit report; Private information; Insider trading; Opportunism (search for similar items in EconPapers)
JEL-codes: G34 J33 K31 M52 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11142-022-09689-x

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