Auditor Style and Common Disclosure Deficiencies: Evidence from SEC Comment Letters

61 Pages Posted: 7 May 2019

See all articles by Matthew Baugh

Matthew Baugh

Arizona State University (ASU) - School of Accountancy

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management

Date Written: March 2019

Abstract

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

Baugh, Matthew and Schmardebeck, Roy, Auditor Style and Common Disclosure Deficiencies: Evidence from SEC Comment Letters (March 2019). Available at SSRN: https://ssrn.com/abstract=3368511 or http://dx.doi.org/10.2139/ssrn.3368511

Matthew Baugh (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management ( email )

The Boyd Center for Business and Economic Research
Knoxville, TN 37996
United States

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