Quality Control in Audit Firms: Do Auditors Learn from Going Concern Errors?
52 Pages Posted: 1 Aug 2018
Date Written: December 31, 2017
This study examines whether auditors use their own going-concern opinion (GCO) errors (i.e., endogenous, results-based audit-quality signals) as audit-quality signals, and whether they use those signals to make adjustments in their subsequent office-wide audit quality. We argue (along with the PCAOB) that GCO errors signal potentially undesirable conservatism levels by auditors, and hence undesirable levels of audit quality. Auditors who recognize this should be able use GCO errors for quality-control purposes. We specifically examine whether auditors adjust their office-wide conservatism (i.e., audit quality) in response to changes in the number of Type I or Type II GCO errors observed in their office in a given period. Using several measures of auditor conservatism (signed abnormal accruals, likelihood of GCO, and subsequent GCO errors) we find evidence that auditors systematically decrease (increase) their office-wide conservatism levels subsequent to increases (decreases) in Type I errors. We also find evidence that auditors systematically increase (decrease) their office-wide conservatism levels subsequent to increases (decreases) in Type II errors. These results suggest that auditors use observable audit-quality signals for real-time quality-control purposes.
Keywords: audit quality, going-concern errors, auditor learning, quality control
JEL Classification: M42
Suggested Citation: Suggested Citation