Audit Office Client Portfolio-Induced Time Pressure and Audit Quality

• In Event: Challenges/Constraints to Audit Quality

Abstract

This paper investigates whether audit quality is lower for companies audited by audit offices subject to relatively greater time pressure. Prior studies find an association between time pressure and audit quality, but evidence at the audit office level is limited. Further, current auditing standards provide little prescriptive guidance on client continuance and acceptance decisions. Audit offices, therefore, have the latitude to select clients with proximate filing deadlines that can strain an audit office’s limited resources and potentially impair audit quality. Our unique measure of audit office time pressure, which we characterize as being client portfolio-induced, reflects the closeness of the audit office’s clients’ financial statement filing deadlines to each other. We use restatements, non-timely filings, receipt of an SEC comment letter, and absolute discretionary accruals to measure audit quality for a sample of calendar year-end public companies from 2003 – 2012. Consistent with our hypothesis, we find that audit office client portfolio-induced time pressure is statistically and economically associated with lower audit quality. In additional analyses, we do not find that audit market competition or audit office location explain our results. We do find that resource-constrained companies (non-accelerated filers) and companies audited by resource-constrained auditors (non-Big N) drive our results. These findings highlight an additional cost to resource constrained entities of accelerated filing deadlines that aim to provide more timely financial information but, in doing so, impose time pressure on audit offices and lower audit quality. Our research also underscores the importance for audit offices to more fully contemplate the knowledge and resources available to meet filing deadlines when making client acceptance and continuance decisions.

Authors

• Keith Czerney, University of Nebraska-Lincoln

• Daun Jang, University of Nebraska-Lincoln

• Thomas C Omer, University of Nebraska-Lincoln