Are Client Importance and Auditor Expertise Associated with How Material Misstatement Corrections Are Disclosed?

Abstract

SUMMARY Management is often motivated to correct misstatements discreetly. Using misstatement corrections disclosed in annual reports from 2007 through 2020, I find that important clients are less likely to disclose material misstatements correctly and that auditor specialization does not seem to impact whether material misstatements are disclosed correctly. Additionally, I find that important clients disclose material misstatement corrections more discreetly when misstatements are negative, when the audit office recently lost clients, when audit market competition is high, and when the restatement auditor is the same as the misstatement period auditor. For immaterial misstatements, client importance is not associated with disclosure accuracy, but specialist auditors increase accuracy. These findings suggest that auditors may allow more discreet misstatement corrections when pressured by important clients. Moreover, specialist auditors exhibit higher quality only when correcting immaterial misstatements. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M41; M42; M48.