Abstract
Estimation risk occurs when individuals form beliefs about parameters that are unknown. We examine how auditors respond to the estimation risk that arises when they form beliefs about the likelihood of client bankruptcy. We argue that auditors are likely to become more conservative when facing higher estimation risk because they are risk-averse. We find that estimation risk is of first-order importance in explaining auditor behavior. In particular, auditors are more likely to issue going-concern opinions, are more likely to resign, and charge higher audit fees when the standard errors surrounding the point estimates of bankruptcy are larger. To our knowledge, this is the first study to quantify estimation risk using the variance-covariance matrix of coefficient estimates taken from a statistical prediction model.
| Original language | English |
|---|---|
| Pages (from-to) | 185-216 |
| Number of pages | 32 |
| Journal | Review of Accounting Studies |
| Volume | 22 |
| Issue number | 1 |
| Early online date | 21 Dec 2016 |
| DOIs | |
| Publication status | Published - 1 Mar 2017 |
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Keywords
- Accounting estimates
- Audit fees
- Auditor resignations
- Bankruptcy
- Estimation risk
- Going concern opinion
ASJC Scopus subject areas
- Accounting
- Business, Management and Accounting(all)
Cite this
Estimation risk and auditor conservatism. / Lennox, Clive S.; Kausar, Asad.
In: Review of Accounting Studies, Vol. 22, No. 1, 01.03.2017, p. 185-216.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Estimation risk and auditor conservatism
AU - Lennox, Clive S.
AU - Kausar, Asad
PY - 2017/3/1
Y1 - 2017/3/1
N2 - Estimation risk occurs when individuals form beliefs about parameters that are unknown. We examine how auditors respond to the estimation risk that arises when they form beliefs about the likelihood of client bankruptcy. We argue that auditors are likely to become more conservative when facing higher estimation risk because they are risk-averse. We find that estimation risk is of first-order importance in explaining auditor behavior. In particular, auditors are more likely to issue going-concern opinions, are more likely to resign, and charge higher audit fees when the standard errors surrounding the point estimates of bankruptcy are larger. To our knowledge, this is the first study to quantify estimation risk using the variance-covariance matrix of coefficient estimates taken from a statistical prediction model.
AB - Estimation risk occurs when individuals form beliefs about parameters that are unknown. We examine how auditors respond to the estimation risk that arises when they form beliefs about the likelihood of client bankruptcy. We argue that auditors are likely to become more conservative when facing higher estimation risk because they are risk-averse. We find that estimation risk is of first-order importance in explaining auditor behavior. In particular, auditors are more likely to issue going-concern opinions, are more likely to resign, and charge higher audit fees when the standard errors surrounding the point estimates of bankruptcy are larger. To our knowledge, this is the first study to quantify estimation risk using the variance-covariance matrix of coefficient estimates taken from a statistical prediction model.
KW - Accounting estimates
KW - Audit fees
KW - Auditor resignations
KW - Bankruptcy
KW - Estimation risk
KW - Going concern opinion
UR - http://www.scopus.com/inward/record.url?scp=85006905591&partnerID=8YFLogxK
U2 - 10.1007/s11142-016-9382-y
DO - 10.1007/s11142-016-9382-y
M3 - Article
VL - 22
SP - 185
EP - 216
JO - Review of Accounting Studies
JF - Review of Accounting Studies
SN - 1380-6653
IS - 1
ER -