Client-Engaged Specialists, Estimation Risk, and Auditor Attention

SUMMARY

This study examines whether auditors adjust attention in response to reliability signals of client-engaged specialists. I exploit the Canadian oil and gas setting, where listed firms must engage and disclose independent reserve evaluators to provide assurance on reserve estimates. Measuring evaluator-revealed performance and associated estimation risk with past portfolio negative revisions, I find that a higher past negative revision rate is associated with higher audit fees, longer audit report lags, and a greater likelihood of late annual filings. The association is present for revisions at both the focal client and other companies in the evaluator’s portfolio, evident for technical and more recent revisions, and stronger when estimation uncertainty is high. Higher negative revision rates are also associated with reserve-related going concern opinions and key audit matter disclosures, but not output-based audit quality. The findings suggest that auditors incorporate specialist performance signals when assessing specialist-related estimation risk and allocating attention.

Data Availability: Data obtained from CanOils Database Ltd. and Compustat are available from the respective providers under license. Hand-collected audit report, restatement, filing, and reserve disclosure information is drawn from publicly available issuer filings on SEDAR/SEDAR+. The author can provide additional information about data construction, subject to the applicable licensing and redistribution restrictions.

JEL Classifications: M41; M42.