Summary of The Value of Auditor Assurance

Summary of The Value of Auditor Assurance

Summary of The Value of Auditor Assurance: Evidence from Loan Pricing

provides empirical evidence on tbe economic value of services provided by independent auditors by analyzing wbether auditor association leads to reduced interest rates on revolving credit agreements. Using multivariate regressions, we analyze the relation between interest rates on revolving bank loans to small, private firms and tbe degree of auditor association with the financial statements provided to the lender.
Because private firms are not required to purchase audits, their demand for auditor assurance is driven hy the expected net benefits of the services purchased, rather than regulatory requirements.

we estimate that the average audited firm's interest rate is 25 basis points lower than that of the average unaudited firm. These interest rate savings cover from 28 to 50% of typical audit fees.

Private firms choose one of four levels of auditor association. Audits, which provide reasonable assurance of a low risk of material misstatement,
Reviews are less comprehensive than audits and provide negative assurance, indicating a moderate risk of material misstatement. a compilation, the accountant assembles the firm's financial information and puts it into a format consistent with GAAP but provides no assurance about the risk of material misstatement. Gompany-prepared statements have no association with an independent accountant. If auditor assurance reduces lenders' monitoring costs (Watts and Zimmerman [1986]), competition will force banks to pass along these cost reductions to borrowers in the form of lower interest rates, ceteris paribus. Experimental evidence on the relation between auditor assurance and loan interest rates is inconclusive.

, the effects on loan pricing are not consistent with these results on loan officer perceptions. Johnson, Pany, and White [1983], for example, find no significant relation between loan interest rates and auditor association in their...

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