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Auditor behavior and the institutional environment: the (new) role of an "emphasis of a matter" paragraph

Author

Listed:
  • Fabio Moraes da Costa

    (FUCAPE Business School)

  • Bruno Funchal

    (FUCAPE Business School)

Abstract

his paper investigates the existence of unqualified opinions with an emphasis of a matter paragraph disclosing uncertainties. We show that depending on institutional characteristics, auditors may be either conservative or aggressive, but there are economies where auditors become moderate. We define a moderate auditor as one that issues an emphasis of a matter paragraph instead of a qualified opinion when there is inconclusive evidence on the client?s condition or even to disguise conclusive evidence about a bad financial condition. We theoretically explain when the type of behavior ? conservative, aggressive or moderate ? will take place. In addition, we show that greater client pressure on auditors increases audit quality. Finally, the existence of an emphasis of a matter paragraph always induces investment in the economy, despite being suboptimal. This paper contributes to the existing literature by demonstrating the determinants and consequences of this new type of attestation.

Suggested Citation

  • Fabio Moraes da Costa & Bruno Funchal, 2010. "Auditor behavior and the institutional environment: the (new) role of an "emphasis of a matter" paragraph," Fucape Working Papers 24, Fucape Business School.
    • Handle: RePEc:bbz:fcpwps:24
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    File URL: http://www.fucape.br/_public/workingpapers/24-2010.pdf
    File Function: Primeira Versão, 2010
    Download Restriction: no
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