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|Other Titles:||Dismissal Threats, Strategic Lending, and Audit Quality|
Wang, Tay-chang;Tseng, Yi-jie;Liu, Chia-wen
Dismissal threats;Audit quality;Auditor independence;Conservatism
|Issue Date:||2016-06-01 14:22:28 (UTC+8)|
This paper adopts a multi-period signaling game model to investigate how a client’s preference over the audit opinion affects his/her willingness to retain the auditor and the audit quality, measured by the degree of auditor independence and conservatism. In addition, creditors’ lending behaviors are introduced to examine the effects of strategic lending on equilibrium. The degree of auditor independence is defined as whether an auditor issues an unfavorable opinion (qualified audit report) when he/she learns that the firm’s state is bad, while the degree of conservatism is whether an auditor issues an unfavorable opinion (qualified audit report) when he/she is uncertain about the firm’s state. We assume that there are two types of auditors in the audit market. The reputation and liability costs of an erroneous unqualified opinion are higher for the type I auditor than those for the type II auditor. The results show that, when creditors make their lending decisions based solely on audit reports, with dismissal threats, both types of auditors could compromise their independence or become less-conservative to maintain the competitive advantage. Besides, the type I auditor is weakly more independent and more conservative than the type II auditor. However, when creditors make their lending decisions based on both audit reports and the perceived types of the auditors, the type II auditor’s independence will be enhanced and the difference in independence across the two types of auditors will be eliminated. Still, the type I auditor is weakly more conservative than the type II auditor.
International Journal of Accounting Studies
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