Joint Meeting of the Mid-Atlantic and Northeast Regions

Does Audit Effort Mitigate the Negative Effect of Macro Uncertainty on Audit Quality?

• In Event: Audit and Partner Quality

Abstract

We investigate whether macroeconomic uncertainty affects audit quality. Literature finds a negative association between audit fees and macroeconomic uncertainty, which suggests a negative impact of macroeconomic uncertainty on audit quality. We provide evidence that although macroeconomic uncertainty is negatively associated with audit quality on average, auditors who deploy more audit efforts, proxied by unexpected audit fees, mitigate this negative association. In addition, the mitigation effect is stronger among clients audited by Big 4 auditors or industry specialists, and clients operating in industries with a higher litigation risk. These results are robust to an alternative sample, an alternative measure of macroeconomic uncertainty, and an alternative measure of audit quality. Overall, our study provides insight into whether and how auditors respond to macroeconomic uncertainty in maintaining audit quality.

Authors

• KangHo Cho, Syracuse University

• Susan M Albring, Syracuse University

• Xiaolu Xu, University of Massachusetts-Boston