Are auditors rewarded for low audit quality? The case of auditor lenience in the insurance industry

Matthew S. Ege and Sarah B. Stuber

Journal of Accounting and Economics, 2022, vol. 73, issue 1

Abstract: Using unique disclosures from the insurance industry, we identify instances where auditors plausibly allow clients to opportunistically utilize discretion in accounting estimates to manipulate losses to reported profits (i.e., auditor lenience). Auditing standards and SEC guidance state that auditors should consider whether a misstatement shifts a loss to a profit as a qualitative factor when evaluating the materiality of misstatements. We find that audit office lenience is positively associated with subsequent market share changes. The effect is driven by increases in the likelihood of keeping existing, non-manipulating clients. In generalizability tests, we find similar inferences in the banking industry when using bank-specific disclosures and across all industries when measuring auditor lenience using likelihood of issuing going-concern opinions. These results highlight settings where auditors may be rewarded for lenience, specifically when management values financial reporting discretion and auditors can avoid publicized audit failures.

Keywords: Auditor lenience; Audit quality; Auditor market share; Insurance industry (search for similar items in EconPapers)
JEL-codes: M41 M42 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:73:y:2022:i:1:s0165410121000392

DOI: 10.1016/j.jacceco.2021.101424

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