Client Conservatism and Auditor-Client Contracting

53 Pages Posted: 3 May 2015 Last revised: 12 Apr 2016

See all articles by Mark L. DeFond

Mark L. DeFond

University of Southern California - Leventhal School of Accounting

Chee Yeow Lim

Singapore Management University - School of Accountancy

Yoonseok Zang

Singapore Management University - School of Accountancy

Date Written: March 1, 2015

Abstract

We find that auditors of more conservative clients charge lower fees, issue fewer going concern opinions, and resign less frequently, consistent with more conservative clients imposing less engagement risk on their auditors. Using path analysis we find evidence that both inherent risk and auditor business risk explain these associations. Also consistent with conservatism reducing auditor business risk, we find that client conservatism is associated with fewer lawsuits against auditors and with fewer client restatements. Taken together, our results are consistent with auditors viewing client conservatism as an important determinant of engagement risk that in turn affects auditor-client contracting decisions. Our findings should be of interest to auditors who actively manage client risk and to standard-setters who recently dropped conservatism as a desired attribute of financial reporting quality.

Keywords: Conservatism, audit fee, going concern audit opinion, auditor resignation, litigation risk, misstatement risk

JEL Classification: M41

Suggested Citation

DeFond, Mark and Lim, Chee Yeow and Zang, Yoonseok, Client Conservatism and Auditor-Client Contracting (March 1, 2015). Forthcoming in The Accounting Review; Singapore Management University School of Accountancy Research Paper No. 2015-25; Marshall School of Business Working Paper No. ACC 01.16. Available at SSRN: https://ssrn.com/abstract=2601343

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)

Chee Yeow Lim

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Yoonseok Zang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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