Auditors’ Influence on Clients’ Accounting Estimates

52 Pages Posted: 10 Sep 2021

See all articles by Allison Koester

Allison Koester

Georgetown University - McDonough School of Business

Bridget Stomberg

Indiana University - Kelley School of Business

Brian Williams

Indiana University - Kelley School of Business - Department of Accounting

Junwei Xia

Texas A&M University - Department of Accounting

Abstract

Accounting estimates are susceptible to managerial errors and bias, thereby generating audit risk. Quantifying and understanding the determinants and consequences of auditors’ influence on clients’ accounting estimates is therefore important. Using a novel econometric technique, we estimate annual measures of auditors’ influence on clients’ tax reserves – a complex and subjective account pervasive across industries. Influence varies across audit offices and within audit offices over time. Influence is smaller (larger) in busier audit offices, offices in geographic areas with greater mutual trust, and offices where clients draw employees from a higher-quality workforce (offices with growth in tax non-audit services and more task-specific expertise in auditing tax reserves). We find greater auditor influence is associated with more relevant tax reserves, fewer SEC comment letters related to tax reserves, and fewer tax-related restatements. Our finding that greater auditor influence is beneficial to clients informs auditors, audit committees, regulators, and financial statement users.

Keywords: auditor influence, accounting estimates, tax reserves

JEL Classification: M40,M42

Suggested Citation

Koester, Allison and Stomberg, Bridget and Williams, Brian and Xia, Junwei, Auditors’ Influence on Clients’ Accounting Estimates. Georgetown McDonough School of Business Research Paper No. 3920001, Available at SSRN: https://ssrn.com/abstract=3920001 or http://dx.doi.org/10.2139/ssrn.3920001

Allison Koester (Contact Author)

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
202.687.6461 (Phone)

HOME PAGE: http://explore.georgetown.edu/people/apk29/

Bridget Stomberg

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Brian Williams

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Junwei Xia

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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