Do Auditors Value Client Conservatism
Year: 2011
Type: conference-paper
Abstract: Auditors risk losing reputation capital when they are suspected of allowing substandard financial reporting, and prior research argues that accounting conservatism acts as a governance mechanism that reduces substandard reporting. Thus, we predict that conservative clients impose lower reputation risk on their auditors, which in turn affects auditor-client contracting and auditor decision-making. Consistent with our predictions, we find that conservative audit clients are less likely to issue accounting restatements; and that auditors charge lower audit fees, issue fewer going concern opinions, and resign less frequently from their conservative clients. In addition, while we also find that client conservatism lowers auditors’ litigation risk, its effect on reputation risk is independent of its effect on litigation risk.
Authors: Yoonseok Zang, Chee Yeow Lim, Mark L. DeFond
Institution: University of Southern California
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1503153372