Liquidity Constraints and Auditor Responses to Repo Transactions

J. Z. Zhang ()
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J. Z. Zhang: Audencia Business School

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Abstract: Repurchase agreements (repos) are often used by banks to manipulate their reported quarter-end risk levels. Prior research has documented adverse capital market consequences associated with active window dressing of repo liabilities. In this study, we investigate whether repos also affect auditors' risk assessments of client banks. Our study reveals that auditor reactions to repos are contingent on the client bank's liquidity constraints, rather than on the extent of repo transactions. Specifically, we find that downward quarter-end deviations in repo liabilities are not perceived by auditors as risky actions for banks with more liquidity. For banks with high liquidity risk exposure, however, we document a strong positive association between repo deviations and audit fees. Our findings suggest that auditors could utilise the contextual cue of liquidity constraints in their attempt to resolve ambiguity surrounding repo transactions, and accordingly charge higher fees for riskier clients. Our results persist for other types of auditor responses, including auditor changes and the issuance of going concern opinions.

Keywords: repos; audit fees; liquidity risk (search for similar items in EconPapers)
Date: 2026-04
New Economics Papers: this item is included in nep-acc
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Published in Journal of Business Finance and Accounting, 2026, 53 (2), pp.778 -797. ⟨10.1111/jbfa.70036⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05578404

DOI: 10.1111/jbfa.70036

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