Auditors’ Liability to Lenders and Auditor Conservatism

We examine the near-privity rule that increases the auditor’s legal liability exposure by considering a debtholder who can sue the auditor and recover damages when there is an audit failure. We show that the increase in the auditor’s legal liability induces the auditor to choose more informative and more conservative efforts. Although the increased informative effort has a favorable spillover effect that increases the equityholder’s expected payoff, the increased conservative effort induces a bias—that is, decreases the likelihood of reporting a true good state as good—and thus induces an adverse spillover effect that decreases the equityholder’s expected payoff. As such, when the conservative effort bias is small, the favorable spillover effect dominates the adverse spillover effect, and the equityholder prefers the near-privity regime. This paper was accepted by Suraj Srinivasan, accounting.

Do Individual Risk Attitudes, Experience, and Organizational Culture Influence the Conservatism of Indonesian Auditors?

This study examines the effects of individual risk attitudes, professional experiences, and organizational cultures on auditor conservatism in Indonesia. On the basis of a factorial survey involving 153 auditors in three major cities in Indonesia (Jakarta, Surabaya, and Denpasar), this study finds strong evidence that, compared with others, auditors with a lower tendency to take risks and those who have less professional experience tend to be more conservative when performing audit tasks. Nonetheless, this study does not find evidence of the influence of organizational culture on auditor conservatism. Overall, the findings of this study could be of interest to professional associations, regulatory bodies, and other policymakers in Indonesia and other countries as they attempt to constrain aggressive reporting through high-quality independent audits by public accountants in their jurisdictions. Keywords: Auditor conservatism, risk attitude, experience, organisational culture, auditing standards

The impact of auditor conservatism on accruals and going concern opinion: Iranian angle

Purpose The purpose of this study is to examine high-quality auditors’ conservatism in Iran market based on the classification of Tehran Stock Exchange (TSE) in terms of their reaction to client’s earnings management behavior and their limitations to issue the going concern opinions (GCOs) over an eight-year period from 2009 to 2016. Design/methodology/approach The study population consists of 1,376 observations and 172 companies listed on the TSE during the years 2009-2016. Following the prior studies, the authors used the modified Jones model to measure discretionary accruals as a proxy for earnings management. Findings The results witnessed a negative relationship between the size of the audit firm and discretionary accruals; besides, the relationship between abnormal accruals and GCO on companies audited by high-quality audit firms is higher than other companies. In other words, firms with GCO, which were audited by the Iranian large auditors, report negative abnormal accruals less than those audited by non-large auditors. In short, in spite of the special features of Iran market because of economic sanctions, this paper extends prior literature clarifying that auditors’ conservatism induces accrual reversals when auditors issue GCOs. One interpretation of this result is that the existence of such association is because of not only auditor conservatism but also financially distressed firms. Practical implications The outcomes of this paper will help to fill the knowledge gap related to this issue between developing and developed countries because this investigation exposed more than ever the vital role of the auditor as an observer on the financial statements. Without any exaggeration, this research will make investors and stakeholders aware of this fact that auditor conservatism will be effective in reducing the manipulation of financial reporting and agency problems in emerging markets, particularly those markets facing with economic sanctions like Iran. Originality/value Because of Iran’s dire economic situation during the period under consideration, this is one of the most comprehensive research among the countries of the Middle East that surveys the impact of auditor conservatism on accruals and GCO in an emerging market, namely, Iran.