Auditor conservatism under enforcement scrutiny

This paper provides evidence on the influence of the presence of an enforcement mechanism on auditors’ decision making. The extant enforcement literature focuses almost exclusively on capital market effects of enforcement actions. However, direct effects need to also receive attention. We conduct an experiment with 40 auditorsto test whether the likelihood of an enforcement review has an impact on auditors requiring conservative accounting choices from clients. Moreover, we test if enforcement leads to more conservative decision making by senior auditors, as opposed to junior auditors, due to their increased level of responsibility and potential liability. The results indicate that the higher likelihood of an enforcement review is not associated with more conservative decision making by auditors. However, auditors who were affected by enforcement reviews in the past tend to make more conservative accounting choices.