Veranstaltungsprogramm der VHB Jahrestagung

While overconfidence and over-optimism of managers and entrepreneurs are intensively discussed in the literature, these biases among auditors have received considerably little attention in research. Since every human may be prone to biased beliefs, an auditor’s overconfidence or over-optimism could affect audit and financial statement quality, intuitively in a negative way. In this paper, we therefore explicitly postulate a biased auditor. First, in a non-strategic setting, we find that the auditor’s overconfidence in his ability to detect errors may affect audit quality both positively and negatively. We show that if the intended audit quality and the degree of overconfidence are relatively low, the resulting audit quality is higher when the auditor is overconfident. In contrast, if the auditor is over-optimistic and underrates the probability of liability, we find that audit quality unambiguously decreases with over-optimism. In a game theoretic setting, where the manager reacts to the auditor’s overconfidence by adjusting his probability to commit fraud, we show that audit quality is affected in the same direction as in the non-strategic setting. Moreover, we analyze a setting with an underconfident auditor, and show how the effects are reversed.

This study examines how intentional financial misrepresentation (i.e., accounting fraud) by a firm affects the financial situation of the individuals who establish the spatial community around which the firm operates. Utilizing granular data from a consumer credit panel covering 10% of the U.S. population with credit histories, we analyze both pre-revelation financial decisions and post-revelation financial distress. Upon revelation, we identify significant increases in indicators of financial distress among individuals who reside in spatial proximity to fraudulent firms' headquarters. On average, we observe incremental increases in debt in collection, affecting approximately one in every one hundred to one in every two hundred individuals. Additionally, we compare individuals' credit demand and supply under fraudulent 'good' information to that under truthful 'bad' information from firms headed for bankruptcy, revealing misinformed financial decisions before the fraud's exposure. Overall, we offer critical insights into the connection between one of the roots of social outcomes, the financial health of a broad set of individuals in a spatial community, and accounting fraud.

We study whether exogenous variation in audit staff’s stress affects audit quality. There is a robust literature on the effect of time pressure on auditing. However, we know little about how non-work stressors affect auditors. An extensive body of research has established that commutes can induce stress. Using a rich dataset of all accidents in the U.S. from 2016 to 2023 to proxy for exogenous variation in stress, we find that increases in accident-induced stress reduce audit quality (higher discretionary accruals, higher restatement and comment letter likelihood). We provide a battery of falsification, robustness, and cross-sectional analyses to corroborate our results and provide evidence that effects are unlikely to be driven by client personnel. Our findings contribute to understanding how exogenous stressors affect auditing.