The contagion effect of low-quality audits

Francis, JR; Michas, PN

The contagion effect of low-quality audits

Francis, JR Michas, PN

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Publication Type:: Journal Article
Citation:: Accounting Review, 2013, 88 (2), pp. 521 - 552
Issue Date:: 2013-03-01

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Field	Value	Language
dc.contributor.author	Francis, JR	en_US
dc.contributor.author	Michas, PN	en_US
dc.date.issued	2013-03-01	en_US
dc.identifier.citation	Accounting Review, 2013, 88 (2), pp. 521 - 552	en_US
dc.identifier.issn	0001-4826	en_US
dc.identifier.uri	http://hdl.handle.net/10453/29812
dc.description.abstract	We investigate if the existence of low-quality audits in an auditor office indicates the presence of a "contagion effect" on the quality of other (concurrent) audits conducted by the office.A low-quality audit is defined as the presence of one or more clients with overstated earnings that were subsequently corrected by a downward restatement. We document that the quality of audited earnings (abnormal accruals) is lower for clients in these office-years (when the misreporting occurred) compared to a control sample of officeyears with no restatements. This effect lasts for up to five subsequent years, indicating that audit firms do not immediately rectify the problems that caused contagion.We also find that an office-year with client misreporting is likely to have subsequent (new) client restatements over the next five fiscal years. Overall, the evidence suggests that certain auditor offices have systematic audit-quality problems and that these problems persist over time. © 2013 American Accounting Association.	en_US
dc.relation.ispartof	Accounting Review	en_US
dc.relation.isbasedon	10.2308/accr-50322	en_US
dc.subject.classification	Accounting	en_US
dc.title	The contagion effect of low-quality audits	en_US
dc.type	Journal Article
utslib.citation.volume	2	en_US
utslib.citation.volume	88	en_US
utslib.for	1501 Accounting, Auditing and Accountability	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Accounting Discipline
utslib.copyright.status	closed_access
pubs.issue	2	en_US
pubs.publication-status	Published	en_US
pubs.volume	88	en_US

Abstract:

We investigate if the existence of low-quality audits in an auditor office indicates the presence of a "contagion effect" on the quality of other (concurrent) audits conducted by the office.A low-quality audit is defined as the presence of one or more clients with overstated earnings that were subsequently corrected by a downward restatement. We document that the quality of audited earnings (abnormal accruals) is lower for clients in these office-years (when the misreporting occurred) compared to a control sample of officeyears with no restatements. This effect lasts for up to five subsequent years, indicating that audit firms do not immediately rectify the problems that caused contagion.We also find that an office-year with client misreporting is likely to have subsequent (new) client restatements over the next five fiscal years. Overall, the evidence suggests that certain auditor offices have systematic audit-quality problems and that these problems persist over time. © 2013 American Accounting Association.

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http://hdl.handle.net/10453/29812