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

• Published in: Journal of accounting & economics Vol. 75; no. 2-3; p. 101551
• Main Authors: Badertscher, Brad A., Kim, Jaewoo, Kinney, William R., Owens, Edward
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.04.2023
• Subjects: Assurance levels; Audits; Cost of debt; CPA fees; Financial reporting quality; Reviews; Financial reporting quality; M48; Audits; Reviews; Assurance levels; CPA fees; G21; Cost of debt; M42; M41
• ISSN: 0165-4101; 1879-1980
• DOI: 10.1016/j.jacceco.2022.101551

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. •Many U.S. private firms choose financial statement compilation or review rather than audit.•CPA fees more than double for each increment in financial statement assurance level.•Financial reporting quality is higher for reviews vs. compilations but similar for reviews vs. audits.•Cost of debt is lower for reviews than compilations and lower for audits than reviews.•Assurance level choice is associated with bank debt, trade credit, and internal control concerns.