Publication Type
Journal Article
Version
submittedVersion
Publication Date
1-2016
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.
Keywords
Conservatism, audit fee, going concern audit opinion, auditor resignation, litigation risk, misstatement risk
Discipline
Accounting | Corporate Finance
Research Areas
Corporate Governance, Auditing and Risk Management
Publication
Accounting Review
Volume
91
Issue
1
First Page
69
Last Page
98
ISSN
0001-4826
Identifier
10.2308/accr-51150
Publisher
American Accounting Association
Citation
DEFOND, Mark L.; LIM, Chee Yeow; and ZANG, Yoonseok.
Client conservatism and auditor-client contracting. (2016). Accounting Review. 91, (1), 69-98.
Available at: https://ink.library.smu.edu.sg/soa_research/1562
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2308/accr-51150