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    Industry Audit Experts and Ownership Structure in the...
    research summary posted March 2, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 11.0 Audit Quality and Quality Control, 11.04 Industry Experience 
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    Title:
    Industry Audit Experts and Ownership Structure in the Syndicated Loan Market: At the Firm and Partner Levels
    Practical Implications:

    The results of this study are important for the PCAOB and other regulatory bodies tasked with considering the economic consequences of requiring an audit partner signature. The motivation behind the PCAOB’s proposal for the signature and disclosure is to increase transparency for interested parties who rely on the financial statements and accountability on the part of the audit partner. In this research, the authors focus on one important interested party, namely lenders, and find that lenders value industry audit experts at the partner level when structuring the ownership of syndicate loans. The findings add to the intense debate on the merits of the PCAOB’s proposal and can be helpful for regulators. The study also provides some evidence that industry audit expertise is viewed as a useful mechanism that mitigates information asymmetry problems faced by lenders in a syndicated loan.

    For more information on this study, please contact Wei-Ren Yao.

    Citation:

    Chin, C.L., W.R. Yao and P.Y. Liu. 2014. Industry Audit Experts and Ownership Structure in the Syndicated Loan Market: At the Firm and Partner Levels. Accounting Horizons 28(4):749-768

    Keywords:
    Partner-level audit expertise; firm-level audit expertise; syndicated loan; ownership structure.
    Purpose of the Study:
    • In 2009 and 2011, the Public Company Accounting Oversight Board (PCAOB) issued two successive releases that seek feedback on the proposal that requires audit firms to disclose the name of engagement partner in standard audit report. The rationale behind the PCAOB’s proposal is that the signature and disclosure requirements can increase transparency and audit partner accountability and, in turn, result in enhanced audit quality. To understand the economic consequences of this requirement further, the authors explores whether industry audit expertise at the partner level is valued by stakeholders, i.e. lenders in the syndicated loan market.
    • In contrast to prior empirical studies on the effect of partner-level industry expertise on audit fees and audit quality, the authors provide further supporting evidence that partner-level industry expertise is valued by stakeholders, consistent with the PCAOB’s argument that the signature and disclosure requirements increase transparency regarding the engagement partner’s identity and, in turn, create an opportunity for the general public (e.g., lenders) to evaluate the engagement partner’s experience and track record (PCAOB 2011, 6).
    • Private loan has become the largest source of worldwide corporate financing; however, little work to date explores the role of audit quality, especially the effectiveness of industry expertise at individual partner level, on mitigating agency cost and reducing information asymmetry between the contracting parties from the viewpoint of debt holders.
    Design/Method/ Approach:

    The research data are collected from a unique sample of listed firms in Taiwan that have syndicated loan data in the 1992-2010 time periods. The audit report in Taiwan is issued in the name of two signing auditors, as well as the audit firm, which provide us with an opportunity to examine whether industry audit experts at the partner level are valued by stakeholders. The impacts of industry audit experts at the individual level on the ownership structure in the syndicated loan are examined using statistical analysis.

    Findings:
    • The authors find that partner-level industry audit experts, either alone or in conjunction with firm-level industry audit experts, are associated with a lower share held by lead arrangers.
    • The authors find that the number of lenders in general (or the number of foreign lenders in particular) in a loan is the largest when borrowers retain industry audit experts at both the firm- and partner-levels.
    • The authors also find that firms audited by industry audit expertise are more likely to gain a larger amount of loan than those retaining non-expertise.
    • These findings suggest that lenders in the syndicated loan market consider part of auditors’ expertise, despite residing within the same audit firm, not to be transferable and homogeneous across individual partners.
    Category:
    Audit Quality & Quality Control, Standard Setting
    Sub-category:
    Impact of PCAOB, Industry Expertise – Firm and Individual