Auditing the Derivative Usage of Bank-Holding Companies

Auditing financial derivatives is complex and contentious. Our study examines the impact of derivative use on the risk premium charged by auditors of bank-holding companies (BHCs). We find that audit fees are higher regardless of whether derivative instruments are used for hedging and trading. This...

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Bibliographic Details
Published in:Accounting horizons 2023-12, Vol.37 (4), p.67-84
Main Authors: Hairston, Stephanie, Johnston, Joseph A., Zhang, Joseph H.
Format: Article
Language:English
Subjects:
Auditing
Auditors
Audits
Derivatives
Hedging
Holding companies
Risk premiums
Trading
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Summary:Auditing financial derivatives is complex and contentious. Our study examines the impact of derivative use on the risk premium charged by auditors of bank-holding companies (BHCs). We find that audit fees are higher regardless of whether derivative instruments are used for hedging and trading. This implies that auditors charge BHCs that use derivatives a risk premium to compensate for additional risk related to these instruments. We also find that trading derivatives tend to have a higher risk premium than hedging derivatives. Our results suggest that auditors price risks related to derivatives, and trading derivatives are perceived to be higher risk than hedging derivatives. Data Availability: All data are available from public databases identified in the paper. JEL Classifications: G21; M40; M41.
ISSN:0888-7993
1558-7975
DOI:10.2308/HORIZONS-2020-197