Abstract

http://ssrn.com/abstract=1132885
 
 

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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

Xuesong Hu


University of Oregon - Department of Accounting

February 10, 2011


Abstract:     
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 [2010], 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

working papers series





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Date posted: May 14, 2008 ; Last revised: February 14, 2011

Suggested Citation

DeFond, Mark L. and Francis, Jere R. and Hu, Xuesong, The Geography of SEC Enforcement and Auditor Reporting for Financially Distressed Clients (February 10, 2011). Available at SSRN: http://ssrn.com/abstract=1132885 or http://dx.doi.org/10.2139/ssrn.1132885

Contact Information

Mark DeFond (Contact Author)
University of Southern California - Leventhal School of Accounting ( email )
Accounting Building, Room 206
Los Angeles, CA 90089-0441
United States
213-740-5016 (Phone)
213-747-2815 (Fax)
Jere R. Francis
University of Missouri at Columbia ( email )
303 Cornell Hall
School of Accountancy
Columbia, MO 65211
United States
573-882-5156 (Phone)
573-882-2437 (Fax)
Xuesong Hu
University of Oregon - Department of Accounting ( email )
Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
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