Disciplinary Sanctions and Audit Quality: Empirical Evidence from an External Oversight System

58 Pages Posted: 9 Jul 2010

Date Written: July 9, 2010

Abstract

This paper provides empirical evidence on the impact of disciplinary sanctions on audit quality, based on the external oversight system set up in Spain in the early nineties. Specifically, we examine the effects of the sanctions imposed by the Institute of Accounting and Auditing (ICAC), a government regulatory agency independent from the auditing industry. To proxy for audit quality, two client-specific earnings quality indicators are considered; i.e. the likelihood of loss reporting and abnormal accruals. According to our results, the Spanish external oversight system does not penalise isolated but structural audit malpractice, since sanctioned auditors exhibit lower average audit quality than non sanctioned auditors. In addition, the empirical evidence provided in this study suggests that audit quality dramatically increases after the start date of an external inspection ultimately leading to a sanction. Audit firms try either to influence the outcome of the ongoing disciplinary process, or to counteract the reputational costs inherent to the probable disclosure of a sanction.

JEL Classification: M42, M48

Suggested Citation

de Fuentes Barbera, Cristina and Illueca Muñoz, Manuel and Pucheta Martínez, María Consuelo, Disciplinary Sanctions and Audit Quality: Empirical Evidence from an External Oversight System (July 9, 2010). Available at SSRN: https://ssrn.com/abstract=1636730 or http://dx.doi.org/10.2139/ssrn.1636730

Cristina De Fuentes Barbera

University of Valencia ( email )

E-46022 Valencia, Valencia E-46022
Spain

Manuel Illueca Muñoz (Contact Author)

Universitat Jaume I ( email )

Dep. Finance and Accounting
Campus del Riu Sec
Castellón de la Plana, E-12071
Spain
34964387135 (Phone)

María Consuelo Pucheta Martínez

Universitat Jaume I ( email )

Campus del Riu Sec
E-12071 Castello de la Plana, Castellón de la Plana 12071
Spain

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