Mortgage Backed Securities, the Financial Crisis, and External Audit Services: Evidence from the Mutual Fund Industry

• In Event: Financial Institutions and the Financial Crisis

Abstract

The SEC has brought charges against several mutual fund companies in connection with the recent financial crisis and fraudulent dealings in mortgage backed securities. For a sample of bond mutual fund companies, we find that “fund level” audit fees increased 6% during the financial crisis period. We find a positive association between holdings of mortgage backed securities and audit fees, but this relation manifests only during the crisis period and not in the pre-crisis period. Furthermore, we find audit fees disclosure during the crisis to be a leading indicator of future fund operating risk. These results suggest that auditors were cognizant of and responded to the increasing risks associated with the financial crisis and mortgage backed securities. However, we also note that auditors did not elevate issuances of adverse audit opinions, going concern opinions, or deficient internal control reports in response to the heightened risks borne by the crisis.

Authors

• Bradley Goldie, The University of Kansas

• Lei Li, The University of Kansas

• Adi Masli, The University of Kansas