Audit quality and COVID-19 restrictions

Purpose - 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. Design/methodology/approach - 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. Findings - 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. Practical implications - 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. Originality/value - 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.