Articlegreen2015

Client Conservatism and Auditor-Client Contracting

Mark L. DeFond · Chee Yeow Lim · Yoonseok Zang

70 citations0/0 files storedThe Accounting Review

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Corporate Governance and Financial Management

Abstract

ABSTRACT We find that auditors of more conservative clients charge lower fees, issue fewer going concern opinions, and resign less frequently, consistent with more conservative clients imposing less engagement risk on their auditors. Using path analysis, we find evidence that both inherent risk and auditor business risk explain these associations. Also consistent with conservatism reducing auditor business risk, we find that client conservatism is associated with fewer lawsuits against auditors and with fewer client restatements. Taken together, our results are consistent with auditors viewing client conservatism as an important determinant of engagement risk that, in turn, affects auditor-client contracting decisions. Our findings should be of interest to auditors who actively manage client risk and to standard-setters who recently dropped conservatism as a desired attribute of financial reporting quality. Data Availability: All data are publicly available from sources indicated in the text.

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References

1982Asymptotic Confidence Intervals for Indirect Effects in Structural Equation Models 2003Corporate Governance and Equity Prices 2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 1997The conservatism principle and the asymmetric timeliness of earnings1 2014A review of archival auditing research 1984Methodological Issues Related to the Estimation of Financial Distress Prediction Models 2003Conservatism in Accounting Part I: Explanations and Implications 2008Who makes acquisitions? CEO overconfidence and the market's reaction☆

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2019Financial report readability and audit fees: a simultaneous equation approach 2014Conditional Conservatism and Audit Fees 2020Auditors’ response to readability of financial statement notes 2020CEO Political Ideologies and Auditor-Client Contracting 2022Credit risk assessment and executives’ legal expertise 2014Litigation risk, financial reporting and auditing: A survey of the literature

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