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Do abnormal accruals affect the life expectancy of audit engagements?

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  • Steven Lustgarten
  • John Shon

Abstract

We examine the cross-sectional determinants of audit engagement length, paying particular attention to abnormal accruals as a potential driver. We are interested in how the potentially incongruent incentives of managers and auditors can cause frictions, and in turn affect the audit engagement’s life expectancy. We estimate a hazard model in the form of a multi-period logit model, allowing us to estimate (the inverse of) the life expectancy of audit engagements. We find that audit engagement life expectancy at any age decreases when firms make relatively large positive or large negative abnormal accruals. One interpretation of these results is that large positive (negative) abnormal accruals make the auditor (client) more likely to terminate the engagement. Conversely, smaller abnormal accruals reflect a compromise which extends the life of the engagement. Our results are robust to several alternative specifications and controls. However, because there is no complete theoretical model that explains audit engagement length, our results should be interpreted with caution. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Steven Lustgarten & John Shon, 2013. "Do abnormal accruals affect the life expectancy of audit engagements?," Review of Quantitative Finance and Accounting, Springer, vol. 40(3), pages 443-466, April.
    • Handle: RePEc:kap:rqfnac:v:40:y:2013:i:3:p:443-466
    DOI: 10.1007/s11156-012-0276-1
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    References listed on IDEAS

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    Cited by:

    1. Sharad Asthana, 2017. "Diversification by the audit offices in the US and its impact on audit quality," Review of Quantitative Finance and Accounting, Springer, vol. 48(4), pages 1003-1030, May.

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    More about this item

    Keywords

    Abnormal accruals; Accruals quality; Audit engagement tenure; Hazard model; Life expectancy; M41; M42;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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