Auditors’ Responses to Asset Redeployability

Abstract

This study shows that auditors are more likely to charge higher audit fees, issue false-positive going concern opinions (i.e., Type I error), and resign from high asset redeployability (AR) firms. In supplemental tests, we use path analysis to show that the significant associations between AR and auditor responses can be explained by higher inherent risk (earnings management and abnormal asset sales) and audit business risk (misstatements and litigation risk). Collectively, our results suggest that auditors tend to react conservatively when firms are associated with high AR.

Keywords: asset redeployability; earnings management, asset sales, business risk, auditor responses

JEL Classification: G31, M41, M42