Managing risk in a poor economy: The association between economic activity and auditor response to risk |
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| Affiliation: | 1. Appalachian State University, Walker College of Business, Department of Accounting, Boone, NC 28608, United States;2. West Virginia University, College of Business and Economics, Department of Accounting, Morgantown, WV 26506, United States;3. Sam Houston State University, College of Business Administration, Department of Accounting, Huntsville, TX 77341, United States;1. Department of Accounting and Taxation, Kogod School of Business, American University, 4400 Massachusetts Avenue, NW, Washington, DC 20016, United States;2. Department of Accounting and Legal Studies, Perdue School of Business, Salisbury University, Salisbury, MD 21801, United States;3. Department of Accounting and Taxation, Goddard School of Business and Economics, Weber State University, Dept 3803, 1337 Edvalson Street, Ogden, UT 84408, United States;4. Department of Accounting, School of Business, Virginia Commonwealth University, 301 West Main Street, Richmond, VA 23284, United States;1. E. C. Robins School of Business, University of Richmond, Richmond, VA 23173, United States;2. John B. Goddard School of Business and Economics, Weber State University, Ogden, UT 84408, United States;3. School of Business, Virginia Commonwealth University, Richmond, VA 23284, United States;1. Faculty of Management, University of Lethbridge, 4401 University Avenue, Lethbridge, Alberta T1K 3M4, Canada;2. Villanova School of Business, Villanova University, 800 Lancaster Avenue, Villanova, PA 19085, United States;3. Villanova School of Business, Villanova University, 800 Lancaster Avenue, Villanova, PA 19085, United States |
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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. |
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