The Effect of Joint Auditor Pair On Timely Loss Recognition: Evidence From Impairment Tests

As some regulators view joint audit as a way to enhance audit quality, French law already requires two (joint) auditors. We examine the impact of auditor pairs on a key mechanism ensuring timely loss recognition: impairment tests. Impairment tests rely on unverifiable fair value estimates and are oftenmanipulated by managers. In a simple game theory model, we assume that Big 4 auditors face higher reputation and litigation costs than non-Big 4. We demonstrate that pairs of Big 4 auditors are likely to lead to the prisoner’s dilemma solution, according to which no auditor takes corrective actions.Conversely, pairs of Big 4 and non-Big 4 auditors increase Big 4’s incentives to force firms to book timely impairments. From a sample of French listed firms(SBF 120) from 2006 to 2009, we provide evidence that: (1) Big 4–Big 4 auditor pairs book more untimely impairments than othercombinations; (2) Big4–Big 4 auditor pairs manage more impairment tests’ transparency ; (3) Big 4–Big 4 auditor pairs do not significantly improve earnings quality as compared to Big 4–non-Big 4 pairs