Do Auditors Value Client Conservatism?

• 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
• Institution: Singapore Management University

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.