Do Auditors Value Client Conservatism?

Do Auditors Value Client Conservatism?

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...

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Bibliographic Details
Main Authors: ZANG, Yoonseok, LIM, Chee Yeow, DeFond, Mark
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2011
Subjects:
accounting conservatism
litigation risk
auditor reputation
audit pricing
audit opinion
auditor resignation
financial restatements
Accounting
Business Law, Public Responsibility, and Ethics
Corporate Finance
Online Access:https://ink.library.smu.edu.sg/soa_research/853
http://leeds-faculty.colorado.edu/zeyun/workshop11-12_files/DLZ%20Jan%2018%202012.pdf
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Institution: Singapore Management University
Language: English
Description
Summary: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.

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