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

62 Pages Posted: 7 May 2019 Last revised: 28 Jan 2020

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: January 2020

Abstract

Policies and procedures that centralize decision-making within an audit firm create auditor style effects. Prior research suggests that auditor style increases financial statement comparability, implicitly making financial statements more useful. However, a potential hazard of auditor style is the propagation of decision errors. We examine the association between auditor style and common disclosure deficiencies among audit clients. We measure auditor style as the presence of a common auditor and use disclosure issues identified through the SEC’s filing review process to measure the occurrence of common disclosure deficiencies. We find that auditor style is associated with common disclosure deficiencies among clientele of the same Big 4 auditor. We also find that clients with the same auditor converge in deficiencies as tenure increases and that clients assume the deficiencies of the subsequent auditor. These results provide the first evidence that auditor style has potential costs in the form of common disclosure deficiencies.

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 (January 2020). 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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