Office level contagion: impact of a non-timely filing by a major busy season client

Abstract

Purpose This study aims to investigate the busy season contagion effects on other clients of the Big 4 auditor’s local office associated with the non-timely (NT) filing(s) by large accelerated filer (LAF) client(s) of the office. Specifically, the authors examine the influence such events have on the audit quality and timeliness of other clients of that office. Design/methodology/approach Using panel data of annual NT filings of LAF clients between 2006 and 2019, the authors apply the ordinary least squares regression technique to model audit reporting lag (ARL) and the logistic regression technique to model the probability of restatements. Findings Controlling for audit firm, industry and year-fixed effects, the authors find that a LAF NT filing reduces audit quality and audit timeliness of other clients of the office, as measured by restatement risk and ARL. The impact on ARL is most pronounced on the medium and small clients within the office. The deteriorated audit quality is observed for medium clients. Research limitations/implications The results of this study have practical implications for auditors and regulators. They reveal the contagion effect in the auditor’s local office with the NT LAF client. The main limitation of the study is the lack of staffing utilization data to allow for drawing conclusions on causality. Originality/value To the best of the authors’ knowledge, this is the first study to document the contagion effect of NT filings of LAF clients conducted at the auditor’s local office level.

The effect of restatements on office-level audit quality

“…The results in this study provide a potential explanation; restatement issuance stresses resources and reduces the quality of concurrent engagements. Skomra et al. (2023) provide evidence that a late filing by a larger client disrupts the scheduling of other engagements, resulting in lower audit quality.…”

“…Audit offices have limited resources, and more than 70% of companies have December fiscal year-ends. Workloads are concentrated in a busy season, and auditors do not have the excess resources to deal with scheduling disruptions and changes in resource requirements (Skomra et al. , 2023).…”

“…, 2021, p. 1). In this environment, disruptions to the audit schedule can impact other engagements (Skomra et al. , 2023).…”

“…, 2016; Lopez and Peters, 2012). Even when changes in the timing or amount of work are engagement specific, because of resource constraints, concurrent engagements can be affected (Skomra et al. , 2023; Dong et al.…”

“…The second measure, audit failure, or the likelihood financials are subsequently restated, is an output-based measure of achieved audit quality (DeFond and Zhang, 2014). The third measure, audit lag, is a measure of timeliness, which is a function of the jointly managed reporting process and of significant importance to investors (Skomra et al. , 2023; Czerney et al.…”