The Spillover Effect of SEC Comment Letters through Audit Firms: Evidence from Subjective Accounting Areas
56 Pages Posted: 22 Mar 2019
Date Written: March 8, 2019
In this study, we examine the spillover effect of SEC comment letters on an auditor’s other clientele. We focus our examination on two frequent comment letter topics subject to auditor attention and scrutiny – accounting estimates and goodwill. We find that when auditors’ clients receive comment letters related to these topics, auditors are more likely to increase their scrutiny of these audit areas among their other clientele as evidenced by an increased likelihood of recording changes in accounting estimates and impairment charges among clients exhibiting goodwill impairment risk. Further analyses do not find that these spillover effects extend to companies in the same locale. While there is some evidence of spillover from goodwill-related comment letters across an industry broadly, the spillover effect is stronger within an auditor’s industry clientele.
Keywords: SEC, comment letter, spillover effect, audit quality, auditor competency
JEL Classification: M41, M42
Suggested Citation: Suggested Citation