The Spillover Effect of SEC Comment Letters through Audit Firms

48 Pages Posted: 22 Mar 2019 Last revised: 29 Oct 2021

See all articles by Kenneth L. Bills

Kenneth L. Bills

Michigan State University - Department of Accounting & Information Systems

Ryan Cating

University of Central Arkansas

Chenxi Lin

University of Oklahoma

Timothy A. Seidel

Brigham Young University

Date Written: October 2021

Abstract

This study examines the spillover effect of SEC comment letters on an auditor’s other clientele. We focus our examination on goodwill, a frequent comment letter topic that garners significant auditor attention. We find that when companies receive an SEC comment letter with goodwill-related comments, their auditors are more likely to increase their scrutiny of this audit area among their other clientele in the same office as evidenced by an increased likelihood of recording impairment charges among their clients that exhibit goodwill impairment risk. Cross sectional analyses suggest that the spillover effect is more pronounced when the comment letter recipient subsequently recognized a goodwill impairment. We observe a similar spillover effect among an auditor’s clientele in the same industry and with changes to companies’ goodwill footnote disclosures. We corroborate these findings using another frequent comment letter topic – revenue recognition – and the likelihood of revenue-recognition related changes in accounting estimates.

Keywords: SEC, comment letter, spillover effect, audit quality, auditor competency

JEL Classification: M41, M42

Suggested Citation

Bills, Kenneth L. and Cating, Ryan and Lin, Chenxi and Seidel, Timothy A., The Spillover Effect of SEC Comment Letters through Audit Firms (October 2021). Available at SSRN: https://ssrn.com/abstract=3349191 or http://dx.doi.org/10.2139/ssrn.3349191

Kenneth L. Bills (Contact Author)

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States

Ryan Cating

University of Central Arkansas ( email )

201 Donaghey Ave
COB 204B
Conway, AR 72035
United States

Chenxi Lin

University of Oklahoma ( email )

Norman, OK 73019-4004
United States

Timothy A. Seidel

Brigham Young University ( email )

Provo, UT 84602
United States

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