Abstract
SYNOPSIS 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.
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