Joint Meeting of the Mid-Atlantic and Northeast Regions

The Accounting Impact from COVID-19 Uncertainty: Evidence from Audit Report Disclosures

• In Event: Audit and Advisory Fees

Abstract

COVID-19 has brought unprecedented uncertainty to firms’ economic operations. We investigate the accounting / auditing implications of this COVID-19 uncertainty on firms. We first identify firms impacted by COVID-19 through mentions in their audit reports, then assess which firms receive these COVID-19 related disclosures, finding firms with intangibles and goodwill are more likely to receive these COVID-19 mentions. Next, we examine the content of these disclosures, finding that auditors’ COVID-19 disclosures focus on significant accounting estimates (e.g., fair value accounting and asset impairment considerations). These results imply that COVID-19 uncertainty presented a triggering event to firms, who reassessed the carrying value of these long-term assets. After exploring the spillover effects to investors and auditors, we find that investors obtain 7.3 basis point abnormal returns following COVID-19 report disclosures and that auditors charge $494,000 higher audit fees to these firms. Results hold using entropy balancing and in two-stage analyses addressing endogeneity.

Authors

• Joseph Micale, New Jersey Institute of Technology

• Joon Ho Kong, Fordham University