The spillover effect of SEC comment letters through audit firms

Kenneth L. Bills (), Ryan Cating (), Chenxi Lin () and Timothy A. Seidel ()
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Kenneth L. Bills: Michigan State University
Ryan Cating: University of Central Arkansas
Chenxi Lin: University of Oklahoma
Timothy A. Seidel: BYU Marriott School of Business, Brigham Young University

Review of Accounting Studies, 2025, vol. 30, issue 1, No 9, 351 pages

Abstract: Abstract This study examines whether auditors serve as a conduit for disseminating Securities and Exchange Commission (SEC) views on reporting and disclosure matters as the result of being privy to clients’ SEC comment letters. This examination is important because auditors’ involvement in and private access to clients’ comment letters can enhance the timeliness of dissemination and constrain reporting or disclosure choices that diverge from SEC views. Among clients with a greater expectation of impaired goodwill that do not receive a comment letter with a goodwill-related comment, we find a greater likelihood of goodwill impairment when the audit firm serving the client is exposed to more goodwill-related comments received by other clients. Further examination of the channels of dissemination through the audit firm indicates that the results are driven by auditor exposure through other clients of the audit office in the same industry, the channel with the greatest exposure to the audit team, and clients in different audit offices in different industries, the channel with the broadest potential for spillover (i.e., the greatest number of other audit firm clients). Importantly, we observe these effects after controlling for alternative sources of spillover and when auditor comment letter exposure is not yet publicly available, suggesting that auditors’ private access to client comment letters facilitates timely spillover. Further analyses indicate that spillover through industry clients within the audit office is also apparent in goodwill footnote disclosure.

Keywords: SEC; Comment letter; Spillover effect; Audit quality; Auditor competency (search for similar items in EconPapers)
JEL-codes: M41 M42 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11142-023-09819-z

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