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Journal of Business Ethics

Erschienen in:

06.02.2016

The Impact of Religion on the Going Concern Reporting Decisions of Local Audit Offices

verfasst von: Thomas C. Omer, Nathan Y. Sharp, Dechun Wang

Erschienen in: Journal of Business Ethics | Ausgabe 4/2018

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Abstract

We extend research on the effects of local audit office characteristics on audit quality by investigating whether audit offices in highly religious U.S. Metropolitan Statistical Areas (MSAs) exhibit going concern decisions that reflect heightened professional skepticism relative to audit offices in less religious MSAs. Prior research links religiosity to risk aversion and ethical development and suggests audit practice offices in more religious MSAs are more likely to issue going concern opinions because they will assess the effects of mitigating factors in a more skeptical manner. Our results indicate that audit practice offices located in highly religious MSAs are more likely to issue going concern audit opinions, consistent with a more skeptical assessment of mitigating factors. Additional tests provide direct evidence consistent with the argument that these audit offices are more risk averse in issuing going concern opinions. Our findings are relevant to auditors, audit clients, researchers, and regulators.

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For convenience, we use the terms “audit firm” and “audit office” interchangeably throughout the paper. Our analyses are conducted at the local audit practice office level.

A related stream of behavioral literature examines the effects of social influence within audit firms on auditor judgment (e.g., Lord and DeZoort 2001; Thorne and Hartwick 2001). We extend this literature by examining the social influence that arises from the religiosity of the geographic area surrounding local audit practice offices.

For parsimony, we refer to audit offices located in highly religious MSAs as “religious audit offices.”

This result is similar to the finding in DeFond et al. (2011) that non-Big 4 auditors are more likely than Big 4 auditors to be affected by the local environment. Specifically, DeFond et al. (2011) show that only non-Big 4 auditors are more likely to issue going concern opinions when the engagement offices are closer to SEC regional offices.

In highly religious locations, individual auditors are more likely to be religious, and they are more likely to be influenced by the religion of the community in which they live.

We use the varimax rotation technique, and the factor loadings are as follows: REL_AFFILIATION 0.84, REL_IMP 0.96, and ATTEND_WEEKLY 0.92. Results are robust to alternative specifications of religiosity.

We present results using both first-time going concern opinions (e.g., DeFond et al. 2002) and all going concern opinions in the Audit Analytics database.

We retain observations that do not report an audit opinion on the effectiveness of internal controls over financial reporting and create a variable that equals 1 if the audit opinion on internal control effectiveness is unobservable and 0 otherwise. These observations are primarily non-accelerated filers.

The correlation coefficients are greater than 0.50. As a robustness test, we drop College_Grad and Repub from the models and repeat all regressions. Inferences are not affected.

The calculation is the natural exponential of (−0.074 − (−0.784)) × 0.455 minus one: e^0.323– 1 = 0.381.

As an additional analysis, we replace FEE_RATIO with the natural logarithm of audit fees and non-audit fees to control for the level of fee dependence, following Blay and Geiger (2013) and Ratzinger-Sakel (2013). The coefficient on Auditor Religiosity remains positive and significant at p < 0.01.

The issues giving rise to lawsuits include accounting and auditing enforcement releases, accounting malpractice, financial reporting issues, and stock options backdating. These classifications are obtained from Audit Analytics.

Inferences are not affected if we create an indicator variable equal to one if the client’s audit fees in year t are greater than the median of audit fees for all clients in year t and zero otherwise.

For example, Table 2 Panel A shows that the percent of Republicans in an MSA and the religiosity of the MSA are highly correlated (0.612).

Its minimum and maximum values are − 2.5 and 2.5 (in $1000).

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Titel: The Impact of Religion on the Going Concern Reporting Decisions of Local Audit Offices
verfasst von: Thomas C. Omer
Nathan Y. Sharp
Dechun Wang
Publikationsdatum: 06.02.2016
Verlag: Springer Netherlands
Erschienen in: Journal of Business Ethics / Ausgabe 4/2018
Print ISSN: 0167-4544
Elektronische ISSN: 1573-0697
DOI: https://doi.org/10.1007/s10551-016-3045-6

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