Are auditors rewarded for low audit quality? The case of the insurance industry

• In Event: Audit Quality

Abstract

Using unique disclosures from the insurance industry, we identify instances where auditors allow clients to utilize discretion opportunistically in accounting estimates to manipulate losses to reported profits. We find that the extent to which audit offices allow this behavior is positively associated with subsequent market share increases. The effect is driven by an increased likelihood of keeping existing clients as opposed to an increased likelihood of attracting new clients. Audit offices that allow this behavior are not associated with an increase in restatements, suggesting that these offices avoid severe audit failures. These results suggest that auditors are rewarded for low audit quality, as captured by clients that under-reserve estimated claim losses in year t to report a profit in year t. These results provide new insights to the audit-quality literature, which generally concludes that auditors are punished for low audit quality and seek to provide high audit quality.

Authors

• Matthew Stephen Ege, Texas A&M University

• Sarah B Stuber, Texas A&M University