The Mitigating Effect of Auditor Competence and Litigation Risk on Client Importance

• In Event: Auditing and Investing
  In Paper Session: Auditing and Investing Research

Abstract

Prior research on the effect of the client importance on audit quality or financial reporting quality provides mixed evidence, whether before or after Sarbanes Oxley Act of 2002 (e.g., Frankel et al., 2002; and Ashbaugh et al., 2003). I argue that the association between client importance and financial reporting quality is affected by other related constructs that mitigate the association between these two variables. The purpose of this study is to examine whether fee dependence or client importance is affected by other variables, namely litigation risk, auditor tenure, and auditor specialization. Using data over the period 2000 to 2014, first I test the effect of client importance on financial reporting quality measured by the absolute value of performance adjusted discretionary accruals, then I test the hypotheses that litigation risk, auditor tenure, and auditor specialization mitigate this effect. The results show these three variables mitigate the effect of client importance on the reporting quality.

Author

• Essam Elshafie, Northeastern Illinois University