Determinants and Consequences of Auditor Conservatism

46 Pages Posted: 11 Oct 2016

See all articles by Essam Elshafie

Essam Elshafie

Northeastern Illinois University

Date Written: October 9, 2016

Abstract

Lu and Sapra (2009) provide a theoretical framework to investigate the causes and effects of auditor conservatism. They refer to the attestation of an auditor who, when in doubt, disapproves a favorable client report as auditor conservatism. In this paper I examine several factors that affect auditor conservatism. The majority of the extant research in this area uses accounting conservatism measures, such as the level of discretionary accruals or the Basu (1997) model to measure auditor conservatism. In this paper I use a new measure of auditor conservatism based on issuing an adverse internal control report for clients with no financial statements restatements, and I examine the effect of client’s business risk, litigation risk, and client pressure on auditor conservatism. In addition, I examine the effect auditor conservatism has on information risk and audit fees. Data are collected over the period of 2004 to 2012, from Audit Analytics, Compustat, the Stanford Securities Class Action Clearinghouse website, and CRSP. The results show that auditor conservatism is positively affected by client business risk and the litigation risk, and negatively affected by client pressure. In addition, the results show that auditor conservatism reduces the information asymmetry and leads to an increase in audit fees.

Keywords: Auditor Conservatism, Determinants of Auditor Conservatism, Consequences of Auditor Conservatism, Auditor Conservatism Measures

Suggested Citation

Elshafie, Essam, Determinants and Consequences of Auditor Conservatism (October 9, 2016). Journal of Accounting, Ethics and Public Policy, Vol. 17, No. 4, 2016, Available at SSRN: https://ssrn.com/abstract=2850139

Essam Elshafie (Contact Author)

Northeastern Illinois University ( email )

5500 North. St. Louis Ave.
Chicago, IL 60625
United States
773-442-6118 (Phone)

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