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The Effect of Deadline Imposed Time Pressure on Audit Quality

Fri, January 16, 3:30 to 4:45pm, TBA

Abstract

Public companies with required reporting deadlines subject auditors to a compressed timeframe in which to obtain sufficient evidence to form a basis for their opinion on the financial statements. Psychology theory posits that individuals adjust their actions to avoid the penalties associated with missing deadlines. Although the effect of deadline pressure on audit quality has been examined experimentally, there is a dearth of archival evidence related to this topic. In this study, we examine the association between deadline imposed time pressure and audit quality. We measure deadline imposed time pressure as the proximity of the auditor’s report date to the required filing deadline. Using different measures of audit quality (restatements and receipt of a GAAP or disclosure related SEC comment letter related to a company’s Form 10-K), we find consistent evidence of lower audit quality when the audit report date is near, at, or slightly beyond the original (or extended) required filing deadline relative to companies with an audit report date preceding the required filing deadline by more than a week. Additionally, although Big N auditors are able to moderate the negative effects of deadline imposed time pressure when the audit report date is near the filing deadline (or beyond the extended deadline), these negative effects persist when completing procedures on the required filing deadline or during the extension period. Our findings suggest that auditors completing procedures at or near the required filing deadline (or extended deadline) may compromise audit quality in an effort to help the client meet the reporting requirement. Our findings also highlight an unintended consequence of an accounting standard change resulting in less opportunity for financial statement users to identify auditors under heightened deadline imposed time pressure.

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