Loan guarantees and key audit matters disclosure: Evidence from China
List of Authors
  • Fazlida Mohd Razali , Lin Minsi

Keyword
  • Loan Guarantee, Key Audit Matters, Firm Risk

Abstract
  • The loan guarantee system plays a crucial role in facilitating bank financing for companies. However, if the borrowing firm is unable to repay the loan, the company providing the loan guarantee faces significant risk, which could also result in substantial losses for investors. The expanded audit report mandates that auditors disclose areas of higher assessed risk of material misstatement or significant risks through key audit matters (KAMs), which is a novel approach to communicating risk information. Thus, this study tries to examine the relationship between the loan guarantee behavior and KAMs disclosure. Utilizing a panel dataset of 16977 non-financial listed companies that issued A-shares on the Shanghai and Shenzhen exchanges from 2017 to 2021, this study within the framework of agency theory investigates the relationship between loan guarantee behavior and KAMs disclosure using OLS regression models. Our research reveals a significant positive correlation between loan guarantees behavior of listed companies and both the number of KAMs disclosed and the negative tone of such disclosures. Auditors demonstrate a greater propensity to employ a more negative tone in KAMs disclosures, rather than increasing the number of disclosures, to alert investors to the risks related to a company's loan guarantee practices. The research findings prove that loan guarantee of companies significantly influences both the amount and tone of KAMs disclosure. The result extends the limited studies on the impact of loan guarantee behaviors on key audit matters from the perspective of guarantors. The empirical findings lend support to the efficiency of KAMs disclosure in conveying firm risk. This evidence substantiates the potential of KAMs for enhancing external corporate governance mechanisms and safeguarding investor interests.

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