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Once bitten once shy: learning or conservatism after audit failure?

Kamath, Saipriya (2016) Once bitten once shy: learning or conservatism after audit failure? .

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Abstract

In this paper I examine whether a large audit failure leads the implicated firm to learn from its experience, or become unduly conservative. Using a difference-in-difference approach, I find that the implicated audit firm, and audit office show a higher propensity to issue unwarranted going concern opinions supporting the hypothesis of auditor conservatism after audit failure. I posit that this conservatism could be over-reaction of implicated audit firm due to availability bias triggered by ease with which an episode of audit fail ure could be recollected. In support of the availability bias hypothesis, I find that within the implicated audit firm, the change in audit quality is in the form of a ripple, with the audit offices closest to audit failure reacting the most, followed by offices that are more distant geographically. Availability bias would also suggest that the change in audit quality will be temporary and I find support for this – once rather than twice shy. Together, these results suggest that following a large audit failure, the implicated audit firm becomes excessively conservative driven by availability bias, but only in the short-term. In the long-term, there is no change in the audit quality of implicated firm.

Item Type: Monograph (Working Paper)
Additional Information: © 2016 The Author
Divisions: Accounting
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
Date Deposited: 11 Oct 2019 09:30
Last Modified: 20 Nov 2019 05:12
URI: http://eprints.lse.ac.uk/id/eprint/102054

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