Natural Disasters and the Job Demands–Resources Model: Catastrophic Effects on Professional Service Firms

• In Event: Exogeneous Shocks and Audits

Abstract

The frequency of reported natural disasters in the United States has risen substantially over the last two decades, resulting in unprecedented social and economic costs. Research in the Job Demands–Resources literature suggests that the introduction of acute extra-organizational job stressors, such as natural disasters, creates an imbalance in the availability of job resources to meet increased job demands. This imbalance increases psychological distress which negatively affects decision-making and work task completion––resulting in a decline in employee performance. Through a professional service firm setting tethered to professional accounting practice, we find that external audits occurring simultaneously with natural disasters influence the financial reporting process of publicly-traded companies. Specifically, we note delays in the release of financial information to the capital markets and increases in client fees. We also find corresponding decreases in the quality of the audit services provided by the auditor; however, perhaps most interesting, we note the decrease in quality is not mitigated by additional effort—as evidenced by protracted timelines for audit work completion and increases in client fees. These findings infer that the occurrence of a natural disaster during audit fieldwork results in professional service firm performance deficiencies that prove detrimental to publicly-traded clients.

Authors

• Jared A Eutsler, University of North Texas

• M. Kathleen Harris, Washington State University

• Tyler Williams, Bentley University