Publication Details
Abstract
This manuscript investigates whether a measure of debt-service pressure - interest burden (IB) based on an inflow-to-outflow basis - explains audit risk (AR) variation in publicly traded industrial companies. The analysis uses a sample of 15 companies from 2015-2023, accounting for firm and year fixed effects, and clustering standard errors by firm. The proxy for AR used is the negative log of the interest coverage, =ARln(ICR)-. The main empirical result is that IB is positively correlated with AR (connected statistically), which indicates that the burden of heavy interest costs materially diminishes coverage and adds risk relevant to audit. Cash-flow Adequacy (CFA) is significantly negatively correlated with AR and Liquidity (LIQ) consistently directionally-related to AR in the directional tests. The traditional leverage measure, stock-based (LEV), and firm size (FS) were not consistently directional to AR when including IB, which provides support for the incremental informational nature of the pure "flow"-based pressure. Profitability (ROA) was positively directionally-related to AR across the sample at moderate economic magnitude, which indicates some timing or composition effect of accrual earnings against cash interest coverage. The results are consistently robust to winsorization and specifications. This paper contributes to the audit risk literature by bringing debt-service flows (IB, CFA) back to the center of audit risks in capital-intensive ecosystems and concludes the paper with some time-travel implications for auditors, managers, and regulators.