Using the market values of audit partners’ houses as a measure of their personal wealth, we find that wealthier U.S. partners provide higher-quality audits, as evidenced by fewer material restatements, fewer material SEC comment letters, and higher audit fees. A battery of falsification tests shows that these findings are not driven by the matching of wealthier partners with clients with higher financial reporting quality. Our additional analyses suggest two explanations: greater personal wealth both incentivizes partners to exert more effort in delivering high-quality audits and reveals partners’ audit competence.

We examine the effect of private firm information dissemination on analysts’ forecast accuracy for public firms, utilizing the mandatory adoption of electronic business registers in EU countries as a (plausibly) exogenous shock. Our findings reveal a significant improvement in analysts’ earnings forecast accuracy following the registers’ implementation that enhanced private firms’ information dissemination, indicating positive information spillovers to public firms. This effect strengthens (i) when private firm disclosures are timelier within the context of the focal public firm’s fiscal year and (ii) when the focal public firm has private firm suppliers, customers, or competitors. However, increased transparency of private firms also reduces analysts’ incentives to cover public firms, as investor attention shifts from public to private firms. This countervailing force negatively impacts analyst forecast accuracy, partially offsetting the positive effects from information spillovers.

Family firms are characterized by less separation between ownership and control (Type 1 agency problem), but greater conflict of interest between controlling insiders and non-controlling outside investors (Type 2 agency problem). Although strong board governance is known to decrease the Type 1 agency problem, its effectiveness in mitigating the adverse consequences of the Type 2 agency problem has not been well documented in the literature. We show that strongly governed family firms are more likely to choose specialist auditors and exhibit higher earnings quality than nonfamily firms. Weakly governed family firms demand lower audit effort and exhibit earnings quality that is no different from that of nonfamily firms. Within family firms, we show that strongly governed family firms choose higher quality audits in the form of a greater use of specialist auditors and higher audit efforts, and exhibit higher earnings quality than other family firms. These findings provide consistent evidence that strong board governance can effectively mitigate the adverse consequences of the Type 2 agency problem on financial reporting and transparency in family firms. Data Availability: The data used are available from the public sources identified in the study.

This study examines the relevance of modified audit opinions (MAO) in private debt contracting. We use the auditor׳s explanatory language to partition MAOs into Inconsistency opinions, resulting from an accounting change or a restatement; and Inadequacy opinions, arising from a material uncertainty or a going concern (GC) opinion. Using the loan contracts of firms with MAOs, we find that, compared with loans issued in the year after a clean opinion, loans issued in the year after an MAO are associated with higher interest spreads (17 basis points on average), fewer financial covenants, more general covenants, smaller loan sizes, and a higher likelihood of requiring collateral. We find that the effect on loan spreads (as well as on other non-price terms) varies by the type of MAO, ranging from no effect for an accounting change to an average increase of 107 basis points for a GC opinion. Additional analyses of GC opinions find that auditors communicate incremental information to lenders about clients’ credit risk. Overall, our empirical results suggest that lenders incorporate the information contained in MAOs into debt contracting.

Whether audit firms should disclose financial statements is controversial among investors, practitioners, and regulators. The debate centers on whether audit firms’ financial statements provide information about audit quality. Using hand-collected data from U.K. audit firms’ financial statements, we construct four measures that capture audit firms’ resource investments (i.e., human capital, workplace environment, technologies) and risk exposures (i.e., litigation provisions). We find that increases in audit firms’ staff costs, investments in tangible assets and IT software, and reductions in litigation provisions are associated with improved audit quality. The information in audit firms’ financial statements is not contained in their transparency reports or regulatory inspection reports. Additional tests show that increases in audit firms’ staff costs and tangible assets, as well as reductions in litigation provisions, are associated with improved audit efficiency.