Financial Reporting Choices of Large Private Firms

Abstract

We perform the first study of the fundamental financial reporting choices – audit, auditor, accounting standard, internal controls audit – of private funds (e.g., private equity, hedge funds, etc.), which represent an increasingly important component of the economy. We find that nearly 80% of private funds that are not subject to mandatory audit requirements obtain audits voluntarily. Larger, older funds with more owners and a higher level of sophisticated ownership are more likely to obtain audits, while funds with a higher level of inside ownership are less likely to obtain audits. Many of these characteristics are also associated with the likelihood of funds engaging a Big 4 auditor, obtaining an internal controls audit, and preparing GAAP financial statements. The growth and creation (termination) of private funds is positively (negatively) associated with funds’ preparation of GAAP financial statements or engagement of Big 4 auditors, providing new evidence on the value of financial reporting in the capital formation process. Overall, our evidence suggests that high-quality financial reporting aids private funds’ capital formation and that funds’ agency costs and the information needs of their equity investors influence funds’ financial reporting choices.