Keywords

SEC, comment letter, spillover effect, audit quality, auditor competency

Abstract

This study examines whether auditors serve as a conduit for disseminating Securities and Exchange Commission (SEC) views on reporting and disclosure matters as the result of being privy to clients’ SEC comment letters. This examination is important because auditors’ involvement in, and private access to, clients’ comment letters can enhance the timeliness of dissemination and have a constraining influence on reporting or disclosure choices that diverge from SEC views. Among clients with a greater expectation of impaired goodwill that do not receive a comment letter with a goodwill-related comment, we find a greater likelihood of goodwill impairment when the audit firm serving the client is exposed to more goodwill-related comments received by other clients. Further examination of the channels of dissemination through the audit firm indicates that the results are driven by auditor exposure through other clients of the audit office in the same industry (the channel with the greatest exposure to the audit team) and clients in different audit offices in different industries (the channel with the broadest potential for spillover [i.e., the greatest number of other audit firm clients]). Importantly, we observe these effects after controlling for alternative sources of spillover and when auditor comment letter exposure is not yet publicly available, suggesting that auditors’ private access to client comment letters facilitates timely spillover. Further analyses indicate that spillover through industry clients within the audit office is also apparent in goodwill footnote disclosure.

Original Publication Citation

Bills, K. L., R. Cating, C. Lin, and T. A. Seidel. 2024. The spillover effect of SEC comment letters through audit firms. Published online at Review of Accounting Studies.

Document Type

Peer-Reviewed Article

Publication Date

2023

Publisher

Review of Accounting Studies

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

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