Investors' Perceptions of Audit Quality: Effects of Regulatory Change
- 1 January 2012
- journal article
- Published by American Accounting Association in AUDITING: A Journal of Practice & Theory
- Vol. 31 (1), 17-38
- https://doi.org/10.2308/ajpt-10192
Abstract
SUMMARY: In an experiment using M.B.A. students as proxies for individual investors, I examine the effects of two important regulatory changes on investors' perceptions of audit quality. The first change examined is from a bottom-up coverage-based approach for auditing internal controls to a more top-down risk-based approach. The second change is litigation reform further limiting auditor liability exposure following an alleged audit failure. I find that investors perceive a reduction in audit quality following each of the two regulatory changes. These observed effects are mediated by a perceived focus on efficiency for the new auditing standard and by a perceived change in the auditor's economic incentives following the proposed litigation reform. I also find that investors believe the perceived reduction in audit quality will lead management to invest fewer resources in internal controls.Data Availability: Contact the author.Keywords
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