Auditor conservatism and reported earnings

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

59 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)19-32
Journal / PublicationAccounting and Business Research
Volume33
Issue number1
Publication statusPublished - Feb 2003
Externally publishedYes

Abstract

Conservatism is an underlying concept of financial accounting. We argue that the auditor forces conservatism on client companies and that the amount of conservatism depends on the economic performance of the company and on the type of audit firm. In particular, we contend that Big Six audit clients use more conservative accounting than non-Big Six audit clients when the clients are performing poorly (as reflected in stock prices). We attribute the more conservative accounting used by Big Six audit clients to the influence of the audit firm. By regressing excess earnings to price ratios on excess stock returns and other variables, we find evidence consistent with our hypothesis that Big Six auditors influence their clients to adopt more conservative accounting than non-Big Six auditors only when the clients' financial performance is worse than expected.

Citation Format(s)

Auditor conservatism and reported earnings. / Chung, Richard; Firth, Michael; Kim, Jeong-Bon.

In: Accounting and Business Research, Vol. 33, No. 1, 02.2003, p. 19-32.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review