The Effect of Joint Auditor Pair On Timely Loss Recognition: Evidence From Impairment Tests

Dana Zhang, Gerald Lobo, Jean-François Casta and Luc Paugam
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Jean-François Casta: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: As some regulators view joint audit as a way to enhance audit quality, French law already requires two (joint) auditors. We examine the impact of auditor pairs on a key mechanism ensuring timely loss recognition: impairment tests. Impairment tests rely on unverifiable fair value e stimates and are often manipulated by managers. In a simple game theory model, we assume that Big 4 auditors face higher reputation and litigation costs than non-Big 4. We demonstrate that pairs of Big 4 auditors are likely to lead to the prisoner's dilemma solution, according to which no auditor takes corrective actions. Conversely, pairs of Big 4 and non-Big 4 auditors increase Big 4's incentives to force firms to book timely impairments. From a sample of French listed firms(SBF 120) from 2006 to 2009, we provide evidence that: (1) Big 4–Big 4 auditor pairs book more untimely impairments than other combinations; (2) Big 4–Big 4 auditor pairs manage more impairment tests' transparency ; (3) Big 4–Big 4 auditor pairs do not significantly improve earnings quality as compared to Big 4–non-Big 4 pairs.

Keywords: Vérification; comptable (search for similar items in EconPapers)
Date: 2013-05
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Citations: View citations in EconPapers (1)

Published in 36th European Accountin Association annual congress, May 2013, Paris, France

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01637689

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