Client importance and unconditional conservatism in complex accounting estimates

Kenneth W. Shaw and James D. Whitworth

Advances in accounting, 2022, vol. 58, issue C

Abstract: In this paper, we examine the relation between client importance to Big 4 audit firm local offices and unconditional conservatism in complex accounting estimates; specifically, stock option volatility, pension expected asset rates of return, and pension discount rates. Changes in these estimates, which can appear small, can have material financial statement effects, have been used in earnings management schemes, and pose greater audit risk. We find that more important audit clients are associated with the use of more unconditionally conservative accounting estimates. These results are consistent with auditor reputation protection rather than important client economic dependence, and suggest client importance does not impair auditor independence with respect to complex accounting estimates.

Keywords: Client importance; Unconditional conservatism; Accounting estimates (search for similar items in EconPapers)
JEL-codes: M40 M41 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:58:y:2022:i:c:s0882611022000347

DOI: 10.1016/j.adiac.2022.100615

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