Managing Risk In A Poor Economy: The Association Between Economic Activity And Auditor Response To Risk

ASU Author/Contributor (non-ASU co-authors, if there are any, appear on document)
Dwayne McSwain PhD, Associate Professor (Creator)
Pennie Bagley PhD, Internship Director, Associate Professor (Contributor)
Appalachian State University (ASU )
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Abstract: We examine the association between economic climate and auditor risk acceptance as measured by the auditors' reaction to internal control weaknesses. We hypothesize and find that auditors address risk in a way that is conditioned on the economic environment. In particular, we find that during periods of weak economic activity, auditors tend to assess lower risk premiums and are less likely to resign in response to an adverse ICFR opinion. However, we find evidence that economic factors do not influence fees assessed by incoming auditors following a resignation in the presence of an ICFR weakness. Our results indicate that auditors modify their engagement risk strategies during challenging economic times and accept higher levels of risk to attract and retain clients. For the riskiest clients, however, economic factors do not appear to influence auditors' risk pricing.

Additional Information

Bagley, P., Dorminey, J., McSwain, D., Reed, T. (2016). Managing risk in a poor economy: The association between economic activity and auditor response to risk. Advances in Accounting, Vol. 32, pages 1-9. Publisher version of record available at:
Language: English
Date: 2016
Auditor fees, Auditor resignation, Economy, Internal control, Risk management

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