Distracted auditors, audit effort, and earnings quality

Research output: Contribution to journalArticleScientificpeer-review

Abstract

In this paper, we explore the implications of audit office distraction for audit effort and quality. We hypothesize that an audit office with financially distressed clients (i.e., a distracted auditor) faces greater time pressures and pays less attention to the audits of the remaining non-distressed clients in their portfolio. If an audit office is distracted, they will have less bargaining power over their audit fees; and non-distressed clients will have greater incentives to engage in earnings management given the reduced expected intensity of professional skepticism. We use the ratio of audit fees derived from financially distressed clients to total audit fees of the audit office to provide strong support for these hypotheses in a sample of US firms over the period 2000-2019. Specifically, we find that distracted auditors have longer delays in issuing audit reports and lower audit fees. When the level of distraction is high, non-distressed clients engage more in accrual and real earnings management and have relatively lower earnings response coefficients. Our results are robust to using entropy balancing, audit firm fixed effects, alternative measures of distraction, and a placebo test addressing mechanical bias and randomness effects. Further analysis indicates that audit firm tenure, and audit office size and industry specialization reduce the negative effects of distraction on audit fees and audit delay. Overall, our results provide new insights on how auditor distraction affects clients’ earnings quality due to reduced effort.
Original languageEnglish
Peer-reviewed scientific journalAccounting Forum
ISSN0155-9982
DOIs
Publication statusPublished - 05.04.2024
MoE publication typeA1 Journal article - refereed

Keywords

  • 512 Business and Management
  • auditor distraction
  • limited attention
  • audit fees
  • audit delay
  • earnings management

Areas of Strength and Areas of High Potential (AoS and AoHP)

  • AoS: Financial management, accounting, and governance

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