Auditor Conservatism and Abnormal Accruals

Tomomi Takada and Katsuhiko Muramiya
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Tomomi Takada: Graduate School of Economics, Kobe University, Japan

No DP2010-10, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: This study investigates the Big 4 auditors' conservatism using Japanese firms' abnormal accruals. We focus on two types of auditors' conservatism, namely, the preference for income decreasing accounting choices and having lower thresholds for issuing going concern opinions. We find that the Big 4 auditors choose the most effective way from among several types of conservatism in order to reduce their litigation risk and/or preserve their reputations. For firms having incentives to increase reported earnings, the Big 4 auditors are conservative by making their client recognize income decreasing accounting choices. On the other hand, for firms facing serious financial problems the Big 4 auditors are conservative by having lower thresholds for issuing going concern opinions. These results indicate that Big 4 auditors' conservative actions vary depending on their clients' situations.

Pages: 43 pages
Date: 2010-03
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