This study examines the association between the characteristics of audit firms and their costs of debt. Financial institutions are concerned about the likelihood of debtor’s default when making loan decisions. Although audit firms are limited liability partnerships, they are not free from the possibility of bankruptcy. When audit firms require capital, they openly borrow money from financial institutions. Audit firm bankruptcy can have significant negative impacts on the stock prices of client firms and, thus, on the capital market (Chaney and Philipich, 2002). Therefore, identifying the determinants of audit firm bankruptcy provides insight to regulators, client firms, and capital market participants. Prior studies have, however, focused on the determinants of litigation against audit firms from the client’s perspective and have not directly examined audit firm’s default risk, mainly because financial statement data for audit firms is not publicly available. The cost of debt is determined by outside creditors. Outside creditors assess ex ante default risk in audit firms and determine the cost of debt for audit firms accordingly. These outsiders may have a different viewpoint on ex ante default risk of audit firms, a viewpoint which may be useful to interested parties surrounding audit firms because the cost of debt can affect the quality of services auditors provide. If audit firms assume a high cost of debt, they may experience financial distress. In order to avoid this distress, audit firms are likely to have incentives to lowball their clients, which, in turn, can lower audit quality (DeAngelo, 1981; Lee and Gu, 1998; Magee and Tseng, 1990; Dopuch and King, 1996; Gul et al., 2009). Thus, understanding the outsider viewpoint and the determinants of the cost of debt is important to regulators, clients, and investors. Using audit firm data publicly available in Korea, we examine the association between audit firm characteristics and the cost of debt as a proxy for audit firm’s default risk. Audit firm’s default risk is evaluated by financial institutions in the form of interest rates specific to each borrowing; in Korea, this information is made available to the general public in the footnotes of their financial statements. The Financial Supervisory Service (FSS) of Korea (the equivalent of the US SEC) requires audit firms to disclose their financial statements and information about loans from financial institutions and the respective interest rates charged by each institution. When an accounting firm has many separate borrowings, the interest rate can be estimated by the weighted average of the disclosed interest rates for each borrowing. For example, two separate borrowings are disclosed as follows in the annual report of Ernst & Young (2011) (Table I). In this case, the weighted average interest rate is 6.03 percent [(3,293 × ۵٫۹۸ percent + 5,528 × ۶٫۰۶ percent)]/ (3,293+5,528) ¼ ۶٫۰۳ percent). Utilizing these data, we examine the association between audit firm characteristics and interest rates as a proxy for audit firm’s default risk. Our study has implications for audit firms, financial institutions, regulators, and the investors and creditors of client firms.