To read the full version of this content please select one of the options below:

Auditor distraction and audit quality

Chengyee Janie Chang (Charles W. Lamden School of Accountancy, San Diego State University, San Diego, California, USA)
Yutao Li (Dhillon School of Business, Calgary campus, University of Lethbridge, Lethbridge, Canada)
Yan Luo (Charles W. Lamden School of Accountancy, San Diego State University, San Diego, California, USA)

Review of Accounting and Finance

ISSN: 1475-7702

Article publication date: 18 July 2022

Issue publication date: 28 July 2022

39

Abstract

Purpose

The purpose of this study is to examine how auditors would react when there are exogenous negative shocks to their client portfolios.

Design/methodology/approach

Using a sample of 31,256 firm-year observations (2001–2016), the authors investigate whether industry shocks to a subset of an auditor’s clients distract the auditor and affect the professional skepticism applied in the audits of other clients.

Findings

The authors find that clients of distracted auditors are more likely to meet or beat analyst consensus forecasts, suggesting that auditors’ professional skepticism is compromised by distractive events. The cross-sectional analyses reveal that the negative impact of the distractive events on audit quality is more pronounced when the distracted auditors audit less important clients, face lower third-party legal liabilities and experience higher growth. Using an alternative measure of audit quality, the additional analysis shows that clients of distracted auditors exhibit a higher probability of restating their earnings in subsequent years. Overall, the empirical evidence suggests that when distracted, auditors render lower quality audit.

Originality/value

The study complements recent work by Cassell et al. (2019), which shows that the 2008–2009 financial crisis affected the quality of the audits of nonbank clients of bank-specialized auditors. While Cassell et al. (2019) focus on one shock (financial crisis) to one industry (i.e. the financial services industry), the study examines more frequent shocks over a wide range of industries to identify the potential effects of distractive events, improving the generalizability of the findings to all industries and all auditors (specialist and nonspecialist) in nonrecession periods.

Keywords

Acknowledgements

Data availability statement: The data that support the findings of this study are publicly available in the sources indicated in the article.

Citation

Chang, C.J., Li, Y. and Luo, Y. (2022), "Auditor distraction and audit quality", Review of Accounting and Finance, Vol. 21 No. 4, pp. 341-373. https://doi.org/10.1108/RAF-11-2021-0317

Publisher

:

Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

Related articles