The Geography of SEC Enforcement and Auditor Reporting for Financially Distressed Clients
Mark L. DeFond
University of Southern California - Leventhal School of Accounting
Jere R. Francis
University of Missouri at Columbia
University of Oregon - Department of Accounting
February 10, 2011
We examine if proximity to a regional office of the SEC affects the independence of auditors as measured by their likelihood of issuing going concern audit reports for financially distressed clients. We find that non-Big 4 offices (but not Big 4 offices) are less likely to issue a going concern audit report when the engagement office is farther away from an SEC regional office. This is consistent with more remote offices of non-Big 4 auditors perceiving a lower risk of SEC enforcement actions, and thus being more willing to compromise their independence and report favorably for clients. We also find that both Big 4 auditors and non-Big 4 auditors are more likely to issue going concern reports for clients that are headquartered farther away from an SEC regional office. This finding suggests risk-protection behavior by auditors and is consistent with Kedia and Rajgopal , which finds that clients farther from SEC regional offices are more likely to misreport. Our study contributes to the literature on audit quality and auditor independence by providing evidence that the geography of SEC enforcement is an important factor in explaining cross-sectional differences in the behavior of Big 4 and non-Big 4 auditors.
Number of Pages in PDF File: 68
Keywords: SEC enforcement, Audit quality, Auditor independence, Going concern audit
JEL Classification: G18, K22, M49
Date posted: May 14, 2008 ; Last revised: February 14, 2011
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