The Impact of Firm Affiliation on Accountants' Error Reporting Decisions: An Experimental Investigation

• In Event: Emerging Issues in Audit Quality

Abstract

Recent regulatory and professional developments have increased the frequency with which public accountants work and interact with professionals from other accounting firms. Findings from archival studies in accounting indicate that when the same firm provides both audit and non-audit tax services, financial reporting outcomes are better than when different firms provide these services, which is attributed to knowledge spillover effects. We add to this literature and posit that in addition to intrafirm knowledge spillover, there may be interfirm rivalry effects when clients retain accountants from different firms to perform audit, tax, and/or consulting services, and we examine whether the communication decisions of professional accountants could be biased in a manner consistent with competition. We conduct two experiments in settings where professional services are commonly split among different firms: the provision of non-audit tax services and the completion of a group audit. We find that, when clients retain different accounting firms to perform professional services, accountants share or withhold information about possible financial statement errors in ways that protect their competitive advantage over rivals, although the specific effects differ between the audit and tax settings. Our results have important implications for financial reporting quality and provide new insights regarding the effects of interfirm collaboration.

Authors

• Stephen Kuselias, Providence College

• Christine Earley, Providence College

• Steve Perreault, Providence College