The Spillover Effect of SEC Comment Letters through Audit Firms: Evidence from Subjective Accounting Areas

56 Pages Posted: 22 Mar 2019

See all articles by Kenneth L. Bills

Kenneth L. Bills

Michigan State University - Department of Accounting & Information Systems

Ryan Cating

University of Arkansas

Chenxi Lin

University of Kansas, School of Business

Timothy A. Seidel

Brigham Young University

Date Written: March 8, 2019

Abstract

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

Bills, Kenneth L. and Cating, Ryan and Lin, Chenxi and Seidel, Timothy A., The Spillover Effect of SEC Comment Letters through Audit Firms: Evidence from Subjective Accounting Areas (March 8, 2019). 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 Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Chenxi Lin

University of Kansas, School of Business ( email )

Lawrence, KS
United States

Timothy A. Seidel

Brigham Young University ( email )

Provo, UT 84602
United States

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