Auditor Style and Common Disclosure Deficiencies: Evidence from SEC Comment Letters
61 Pages Posted: 7 May 2019
Date Written: March 2019
Auditor style results from policies and procedures that centralize decision-making within an audit firm. This style increases financial statement comparability, implicitly making financial statements more useful to outsiders. A potential hazard of centralized decision-making is the propagation of decision errors throughout the audit firm. We predict and find that auditor style is associated with a set of common disclosure deficiencies among audit clientele as measured by the similarity of comment letters from the Securities and Exchange Commission’s filing review process. Clients converge in both style and disclosure deficiencies as auditor tenure increases. Further, after changing auditors, clients assume the style and disclosure deficiencies of the subsequent auditor. These results provide the first evidence that auditor style, while potentially beneficial to users of the financial statements, also has potential costs.
Keywords: Audit quality, auditor style, financial statement comparability, SEC comment letters
Suggested Citation: Suggested Citation