Determinants of Audit Sanctions Severity

Abstract

This study investigates the effects of material weaknesses from auditing standards and of material misstatement from accounting standards on the audit sanctions severity. Using a unique database in the period 1983 -2015, we find mixed results. Among the auditing standards, Internal Control Weaknesses lead to more severe audit sanctions than Quality Control, Other Auditors, Reporting and Audit Opinion Material Weaknesses Audit Sanctions, and to less severe audit sanctions than Professional Skepticism and Substantial Procedures. Among accounting standards, Fair Value misstatements are associated with more severe audit sanctions than Long-term investment, bank debts, and liquidity errors, and with lower severity of audit sanctions than Account receivables. Taken together, these findings suggest two main determinants of audit sanctions severity that auditors and accountants need to be aware: the area of internal control deficiencies and the area of fair value measurement. From these results, we learn that accounting and auditing standards errors have different likelihood of audit sanctions, and that auditors that aim to avoid sanctions need to invest mainly in the internal control assurance and in the fair value items of the financial reporting.