Pay to win?:

: the impact of accounting conservatism on audit quality through the lens of audit fees

Abstract

This study investigates the relationship between accounting conservatism and audit quality, examining whether the asymmetric reversibility of earnings— where losses tend to reverse more quickly than gains—can be used as an indicator of audit complexity, reflected in higher audit fees. While conservatism is widely studied as a mechanism for constraining earnings management and enhancing financial reporting quality, its impact on audit planning and resource allocation remains underexplored. Using a sample of U.S. listed firms between 2010 and 2024, this study extends the Basu (1997) model by introducing interactions with audit fees to test whether conservatively recognized earnings influence auditors’ perception of risk and complexity. The findings reveal a positive association between audit fees and the asymmetric reversibility of gains, suggesting that auditors respond to conservative reporting with increased verification effort. These results remain robust after controlling for year fixed effects. This research contributes to the existing literature by establishing a link between financial reporting behavior and audit quality outcomes, positioning conservatism not merely as a reflection of accounting discipline, but as a factor that shapes audit effort and procedures. The study offers relevant practical implications for auditors, regulators, and accountants by showing how conservative reporting affects risk assessment and audit fee determination, by directing verification procedures toward estimate-based areas where the reversibility of losses requires heightened scrutiny.

Date of Award	22 Oct 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Aviner Manoel (Supervisor)