The Information Value of Qualified and Adverse Audit Reports: Evidence from the Municipal Sector

• In Event: Issues in the Municipal Debt Market

Abstract

This study investigates whether qualified/adverse audit opinions on the fairness of the financial statements impact U.S. capital markets. Using hand-collected data from 1,560 official registration statements, we find that municipal bond markets penalize counties and local governments with qualified/adverse audit opinions for both primary market issuances and secondary trading. Our primary market findings hold for two matched samples (attribute and propensity score), a within- sample analysis, and a number of robustness tests. Overall, our results provide compelling evidence that investors value the information content of an independent audit report, especially as it relates to an auditor’s primary responsibility to assess the fairness of GAAP historical financial statements. Our results also lend support to recent SEC initiatives to expand municipal auditor reporting to smaller governments and conduit borrowers.

Authors

• Chris Edmonds, University of Alabama at Birmingham

• Ryan D Leece, University of Alabama-Birmingham

• Beth Y. Vermeer, University of Delaware

• Thomas E Vermeer, University of Delaware