Auditor conservatism, audit quality, and real consequences for clients

• 成果类型: Article
• 署名作者: Hall, Curtis; Judd, J. Scott; Sunder, Jayanthi
• 署名单位: Drexel University; University of Illinois System; University of Illinois Chicago; University of Illinois Chicago Hospital; University of Arizona
• 刊物名称: REVIEW OF ACCOUNTING STUDIES
• ISSN/ISSBN: 1380-6653
• DOI: 10.1007/s11142-021-09653-1
• 发表日期: 2023
• 页码: 689-725
• 关键词: earnings management; accounting conservatism; corporate governance; Financial crisis; LITIGATION; RISK; association; uncertainty; Timeliness; lawsuits

摘要

Auditors tend to be more conservative in their audits when they face greater litigation risk. However, it is unclear whether this conservatism is always desirable or whether it can be excessive. To evaluate the usefulness of greater auditor conservatism, we examine whether auditor conservatism improves audit quality and imposes real operating consequences for clients. We examine auditor behavior in a sample of auditors' client banks, when one of the auditor's other client banks fails (as deemed by the FDIC). We find that auditors that experience a bank failure within their portfolio become more conservative for surviving clients. However, we find that the larger loan loss provisions at surviving clients are no more timely, are less accurate, and reverse in subsequent periods. This finding suggests that auditors' initial portfolio-wide response to a specific client failure may be overly conservative. We also document that surviving client banks face real consequences in terms of constraints on their lending because of the auditor's excessive conservatism. Overall, we conclude that, in some situations, auditors may overreact, leading to excessive conservatism, which in turn has adverse consequences for clients.