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Auditor Conservatism and Abnormal Accruals

Author

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  • Tomomi Takada

    (Graduate School of Economics, Kobe University, Japan)

  • Katsuhiko Muramiya

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

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.

Suggested Citation

  • Tomomi Takada & Katsuhiko Muramiya, 2010. "Auditor Conservatism and Abnormal Accruals," Discussion Paper Series DP2010-10, Research Institute for Economics & Business Administration, Kobe University.
    • Handle: RePEc:kob:dpaper:dp2010-10
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    Cited by:

    1. Susana Callao & José I. Jarne & David Wróblewski, 2019. "A New Perspective on Earnings Management in Emerging European Countries: Investigation on Environmental Factors that Explain Differences in Earnings Management," Journal of Accounting, Business and Finance Research, Scientific Publishing Institute, vol. 7(2), pages 59-81.

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