SUMMARY This study investigates whether qualified/adverse audit opinions on the fairness of the financial statements impact market yields for city/county general obligation bonds. Although state and local governments represent a significant part of the U.S. economy, the value of external assurance in this market is questionable given the untimely nature of municipal audit reports. We find evidence consistent with municipal bond market participants penalizing counties and local governments with qualified/adverse audit opinions for both primary market issuances and secondary trading. For example, in a propensity score matched sample, we find that, on average, primary market yields are higher by 34 higher basis points for municipalities receiving qualified/adverse audit opinions. Our primary market findings hold for two matched samples (attribute and propensity score), a within-sample analysis, and a number of robustness tests. The results suggest that municipal investors value the information content of an independent audit report. Data Availability: Data are available from the public sources cited in the text.
The purpose of this study is to examine the determinants of online availability and the ease of accessibility of U.S. municipality, county, school district, and special district audited financial statements. Using a sample of local governments that prepared 2017 audited financial statements, we find that certain forms of oversight by voters, auditors, and states are positively associated with the availability of audited financial statements. Our descriptive analysis also suggests that smaller governments, special districts, and school districts, many of which cover vast constituency populations, are lagging behind their municipality and county counterparts in online financial reporting. Our multivariate results suggest that as legislative/oversight bodies and citizens consider the potential benefits of additional forms of local government oversight, they should consider our findings that greater oversight is positively associated with the availability of local government audited financial statements.
This study provides new insights about how tax professionals' economic and social relationships with clients separately and jointly affect tax professionals' propensity to recommend aggressive tax positions to clients when resolving ambiguous issues. In an experiment with 133 practicing tax professionals, we manipulate the economic importance of the client and client identification (a social construct). We find that as the economic importance of the client increases, professional recommendations follow an inverted U-shaped pattern. Tax professionals more strongly recommend aggressive positions for clients of moderate economic importance than for clients of low or high economic importance. We also find that tax professionals with high versus low client identification provide more aggressive recommendations for clients of low or moderate economic importance, but not for clients of high economic importance. This paper contributes to the literature by identifying a boundary condition on client identification that has not been considered in prior accounting research.
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