The contagion effect of low-quality audits

Jere R. Francis, Paul N Michas

Research output: Contribution to journalArticle

58 Citations (Scopus)

Abstract

We investigate if the existence of low-quality audits in an auditor office indicates the presence of a "contagion effect" on the quality of other (concurrent) audits conducted by the office.A low-quality audit is defined as the presence of one or more clients with overstated earnings that were subsequently corrected by a downward restatement. We document that the quality of audited earnings (abnormal accruals) is lower for clients in these office-years (when the misreporting occurred) compared to a control sample of officeyears with no restatements. This effect lasts for up to five subsequent years, indicating that audit firms do not immediately rectify the problems that caused contagion.We also find that an office-year with client misreporting is likely to have subsequent (new) client restatements over the next five fiscal years. Overall, the evidence suggests that certain auditor offices have systematic audit-quality problems and that these problems persist over time.

Original languageEnglish (US)
Pages (from-to)521-552
Number of pages32
JournalAccounting Review
Volume88
Issue number2
DOIs
StatePublished - Mar 2013

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Quality audit
Contagion effect
Restatements
Auditors
Misreporting
Abnormal accruals
Audit quality
Contagion
Audit firms
Fiscal
Audit

Keywords

  • Audit quality
  • Auditor offices
  • Contagion

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

The contagion effect of low-quality audits. / Francis, Jere R.; Michas, Paul N.

In: Accounting Review, Vol. 88, No. 2, 03.2013, p. 521-552.

Research output: Contribution to journalArticle

Francis, Jere R. ; Michas, Paul N. / The contagion effect of low-quality audits. In: Accounting Review. 2013 ; Vol. 88, No. 2. pp. 521-552.
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