Estimation risk and auditor conservatism

Clive S. Lennox, Asad Kausar

Research output: Contribution to journalArticle

9 Citations (Scopus)

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 languageEnglish
Pages (from-to)185-216
Number of pages32
JournalReview of Accounting Studies
Volume22
Issue number1
Early online date21 Dec 2016
DOIs
Publication statusPublished - 1 Mar 2017

Keywords

  • Accounting estimates
  • Audit fees
  • Auditor resignations
  • Bankruptcy
  • Estimation risk
  • Going concern opinion

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)

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