This study aims to examine declines in audit quality after the COVID-19 travel restrictions/stay-at-home orders were issued in the USA in early 2020.
Taking advantage of variation in the dates of stay-at-home orders issued by different US states, this study identifies engagements that were significantly affected by the lock down orders.
The results suggest that engagements affected by the restrictions produced lower audit quality, as measured through restatements and discretionary accruals, relative to those completed before COVID-19 travel restrictions/stay-at-home orders. Further analysis reveals that this decrease in audit quality was attributable to firms with high inventory relative to assets, high R&D expenses relative to assets and non-Big 4 auditors.
This study finds that the restrictions on physical and on-site interaction caused auditors to universally struggle with resource/judgment-intensive accounts such as inventory and R&D expenditures. The results suggest that while Big 4 auditors managed to maintain their status quo level of audit quality following COVID-19 restrictions, non-Big 4 auditors were unable to overcome the challenges of an online work environment and their audit quality declined.
To the best of the authors’ knowledge, this paper is the first to empirically examine changes in audit quality as a response to a substantial change in auditors’ working environment due to the global health crisis. As work-from-home becomes more prevalent in audit firms, the results suggest that, on average, this move does diminish audit quality.
