Resource Constraints at Audit Offices and Audit Quality: Evidence from Auditing Clients with Natural Disasters

This study examines whether and how resource constraints under busy situation at an audit office influences audit quality. We leverage on natural disasters that introduce exogenous variations in audit office busyness to tackle the endogeneity arising from the commonly used busyness measures (e.g., clientele size). Specifically, we posit that audit offices with disaster-affected clients are busy offices, because disaster-affected clients demand significant additional effort from an audit office and hence stress the resources available to the other non-disaster-affected clients audited by the same office. We find that, compared to clients audited by non-busy audit offices, non-disaster-affected clients audited by busy audit offices exhibit an increased likelihood of restatements and greater absolute discretionary accruals, consistent with auditor busyness adversely affecting audit quality. We further find that such negative effect is more pronounced when the degree of audit office busyness is greater as well as when the busy office is less likely to alleviate the resource constraints. Our study provides new insights on the implications of audit office resource allocation.