Academic journal article Auditing: A Journal of Practice & Theory

The Impact on IPO Assurance Fees of Commercial Bank Entry into the Equity Underwriting Market

Academic journal article Auditing: A Journal of Practice & Theory

The Impact on IPO Assurance Fees of Commercial Bank Entry into the Equity Underwriting Market

Article excerpt

Recent changes in the United States Banking Act (Glass-Steagall Act) have allowed commercial banks to enter the initial public offering (IPO) underwriting market. In this research, we examine the effect of commercial bank equity underwriting on independent accountant fees during the IPO registration period. The independent accountant's role in the IPO process includes auditing the financial statements, providing advice on the IPO, and general services involving the resolution of accounting issues, due diligence procedures, and reading of registration statements.

There are several factors that suggest independent accountants will charge higher fees when commercial banks rather than traditional investment banks underwrite an IPO. First, commercial banks are new to equity underwriting and might require the client to obtain more assistance from accounting firms in the IPO process than will traditional underwriters. Second, commercial banks, as new entrants to the market, may underwrite lower quality issues, i.e., clients with greater audit risk, requiring more assurance efforts. Finally, commercial banks have greater assets and may, therefore, be greater targets for litigation than are traditional underwriters. This litigation risk may lead the bank to require the client to obtain a higher quality audit. However, commercial banks may possess an informational advantage relative to traditional underwriters through previous loan-monitoring activities. …

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