Question : What are some ways in which the role of auditing affects the debt markets and compliance with debt covenants?
Putting together a project for summer class, and could use some guidence on this topic! Ten points for anyone who can offer some insight, thanks!
compliance audit

Best answer:

Answer by Matt
The cost of debt financing is reduced if the issuing company has audited financial statements. Just like the debt markets, a local bank will offer more favorable trade terms & rates to companies with audited financial statements than they would offer to a company that merely has reviewed or compiled (unaudited) financials.

On a more macro scale, auditing helps to insure that companies are able to repay their debts and serves to protect those who purchase debt instruments. A breakdown in the debt markets, as happened in the 1980s S&L scandal, could be devastating and have a cascading effect throughout the entire economy. Having independent CPAs issue an opinion as to whether the financial statements present fairly, in all material respects, the financial condition and results of operations is a vital tool that protects debt markets, and the world economy as a whole, from all out turmoil.

AMBAC and MBIA insure tons debt instruments, almost every bond issued. A collapse of either entity would trigger economic chaos across world markets. Furthermore, it could lead to a meltdown in the credit default swap (CDS) & credit default obligation (CDO) markets, which is something like $ 60 trillion (nearly the size of the world’s combined GDP). Luckily, it looks as though this kind of disaster has been averted.