Do Emotions Affect Audit Practice? Terrorist Attacks and Accounting Misstatements

Abstract

Psychology and neuroscience research shows that individuals with negative emotions (e.g., fear) are more sensitive to negative signals and exhibit a higher degree of risk aversion. Using local terrorist attacks as exogenous shocks that cause auditors to experience more negative emotions in the audit period, I empirically study the impact of negative emotions on audit practice. I find that accounting misstatements are less likely to occur for firms when there is a local terrorist attack in the audit period. The reduction in misstatements is stronger for auditors who are located closer to the terrorist attacks. Further evidence suggests that affected auditors are more likely to issue going concern opinions, spend more time on the audit, and charge higher audit fees. I obtain a similar set of results using airplane crashes as an alternative source of emotional shocks. Overall, the evidence is consistent with the idea that auditors with more negative emotions exert greater effort to lower misstatement risks. My findings provide large-scale archival causal evidence that emotions can affect audit outcomes.