Estimation risk and auditor conservatism

• 成果类型: Article
• 署名作者: Lennox, Clive S.; Kausar, Asad
• 署名单位: University of Southern California; Nanyang Technological University
• 刊物名称: REVIEW OF ACCOUNTING STUDIES
• ISSN/ISSBN: 1380-6653
• DOI: 10.1007/s11142-016-9382-y
• 发表日期: 2017
• 页码: 185-216
• 关键词: FINANCIAL RATIOS; LITIGATION; prediction; reputation; bankruptcy; ability; impair

摘要

Estimation risk occurs when individuals form beliefs about parameters that are unknown. We examine how auditors respond to the estimation risk that arises when they form beliefs about the likelihood of client bankruptcy. We argue that auditors are likely to become more conservative when facing higher estimation risk because they are risk-averse. We find that estimation risk is of first-order importance in explaining auditor behavior. In particular, auditors are more likely to issue going-concern opinions, are more likely to resign, and charge higher audit fees when the standard errors surrounding the point estimates of bankruptcy are larger. To our knowledge, this is the first study to quantify estimation risk using the variance-covariance matrix of coefficient estimates taken from a statistical prediction model.