When Analysts Speak, Do Auditors Listen?

Abstract

SUMMARYPrior studies examining the interactions of auditors and analysts have generally focused on how auditors influence analysts' forecasts or audit clients' behavior relative to those forecasts without considering how analysts might influence auditors. However, auditing standards encourage auditors to incorporate analyst-provided information into their risk assessment and audit planning. This study investigates whether auditors respond to a signal of potential misstatement risk derived from differences between auditors' earnings expectations and analysts' forecasts. Results indicate that auditors respond to this signal by charging higher fees and delaying the release of the audit report, which in combination suggest greater audit effort. Further, this signal reflects actual misstatement risk in the form of subsequent restatements, but audit effort mitigates this risk. Finally, auditors' response to analyst information is attenuated when forecast dispersion and forecast error suggest the signal lacks credibility. Overall, these findings suggest that auditors incorporate analyst-provided information into the audit process.JEL Classifications: M41; M42; M48.