Distracted Auditors and Corporate Reporting Environment

In a situation where a financially distressed client of an audit office is highly exposed to earnings misstatements, the office is likely to intensify the professional scrutiny of that client’s audits to mitigate its audit risk. That scenario could mean the office becomes distracted and potentially pays less attention to the audits of the remaining non-distressed clients in its portfolio. This paper examines whether the extent of distraction is associated with the audit quality and the information environment of non-distressed clients. We define auditor distraction at the office level with reference to the ratio of audit fees derived from financially distressed clients to total audit fees. Using a sample of U.S. firms over the period 2000–2018, we find that auditor distraction is associated with lower audit fees and longer delays to issuing audit reports. We also find that auditor distraction relates adversely to the corporate information environment. Our findings suggest that auditor distraction is associated with lower audit quality and opaque information environments, both of which potentially impact audit risk and the overall informativeness of financial statements.