Errors in accounting estimates and their relation to audit firm type

Article Abstract:

The accuracy and bias in accounting estimates of claim loss reserves as they were reported in the audited financial statements of 197 property-casualty insurers from 1979 to 1983 were assessed to determine how auditor judgment is affected by differences in size among audit firms. Variations in the bias and accuracy of the insurers' estimates for clients of Big Eight audit firms, as well as other audit firms were likewise examined since the probability of an audit adjustment is greatest for cash-strapped insurers. Although the analysis showed large errors in reported claim loss reserves, no systematic differences in claim loss reserve accuracy or bias between Big Eight clients and the clients of other audit firms or across a continuous measure of audit firm size were observed. However, bigger auditors seemed more conservative in estimating reserve for financially troubled insurers.

Accounting, Practice

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Client security price reactions to the Laventhol and Horwath bankruptcy

Article Abstract:

Leading accounting firm Laventhol and Horwath (LH) filed for Chapter 11 bankruptcy on Nov. 21, 1990. During the two-day period around the bankruptcy announcement, it was observed that a portfolio of 75 LH client common stocks posted statistically significant risk-adjusted returns of -1.91%. Two possible explanations for such security price reactions are offered and examined. The first of these, the insurance explanation, proposes that investors depend on auditors to recover what investment losses they may incur in the future. The second, the audit quality explanation, holds that investors perceive financially troubled auditors to perform poorly than financially sound auditors. A study testing these explanations found support for both.

Research, Finance, Prices and rates, Stocks, Stock prices, Bankruptcy, Laventhol and Horwath

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