Seasonal affective disorder and audit quality

• Published date: 01 April 2023
• Author: Rachana Kalelkar,Qiao Xu,Lele Chen
• Date: 01 April 2023
• DOI: http://doi.org/10.1111/ijau.12304

ORIGINAL ARTICLE

Seasonal affective disorder and audit quality

Rachana Kalelkar

1

| Qiao Xu

1

| Lele Chen

2

1

Department of Accounting, College of

Business, University of Houston –Victoria,

Victoria, Texas, USA

2

Department of Accounting, San Francisco

State University, San Francisco, California,

USA

Correspondence

Rachana Kalelkar and Qiao Xu, Department of

Accounting, College of Business, University of

Houston –Victoria, 3007 N. Ben Wilson St.,

Victoria, TX 77901, USA.

Email: kalelkarr@uhv.edu;xuq@uhv.edu

Lele Chen, Department of Accounting, San

Francisco State University, 1600 Holloway

Avenue, San Francisco, CA 94132, USA.

Email: lesleychen@sfsu.edu

This paper investigates whether seasonal affective disorder (SAD) influences audit

quality. On the one hand, a SAD-induced negative mood can render auditors risk-

averse in auditing. On the other hand, SAD can lower their cognitive ability and effi-

ciency at work. Our results show that absolute discretionary accruals and the likeli-

hood of restatements are lower when the level of SAD is higher during the audit

period, thus suggesting that SAD lowers auditors' willingness to accept aggressive

reporting. Other tests show that the relationship between SAD and audit quality is

not significantly different between the fall and winter or between industry expert

and non-industry expert auditors. We also find that the association between SAD

and audit quality is more pronounced for auditors located in northern states than

southern states. Lastly, our results hold after controlling for management reporting

choices, auditor busy season, auditor locality and other robustness tests. Overall, this

paper contributes to the auditing literature by highlighting the effect of environmen-

tal factors on auditors' professional judgement from a psychological perspective.

KEYWORDS

absolute discretionary accruals, audit quality, restatements, seasonal affective disorder

1|INTRODUCTION

Seasonal affective disorder (hereafter, SAD) is a form of psychological

condition caused during seasons of the year that have shorter daylight

hours. Every year, a significant number of individuals suffer from SAD

during the months of fall and winter (Rosenthal, 1998). Among other

things, individuals affected by SAD often experience low mood, loss

of interest, low energy and low cognitive processing ability.

1

Psychol-

ogy literature that focuses on human mood exhibits that negative

mood induces risk averseness and pessimism about prospects among

individuals (Carton et al., 1995). Many finance scholars test this theory

in the financial market setting and demonstrate a negative correlation

between SAD and stock returns (Garrett et al., 2005; Kamstra

et al., 2003,2009). Recently, Dolvin et al. (2009) revealed that the

behavioural effect of SAD is also observed among highly trained

professionals like financial analysts. In this paper, we focus on another

professional body, auditors, and investigate whether their mood and

behaviour are affected by SAD.

Auditors play an important role in maintaining the credibility of

financial reporting. Consequently, many auditing studies, especially

post the financial reporting fraud in 2002, focused on factors that

influence the audit quality. Notably, these studies explore the firm-,

office- and partner-level characteristics of auditors that could likely

affect the audit quality (Francis, 2004). For instance, these studies

investigate auditor size, expertise, tenure, gender and compensation

and document that these auditor characteristics have a significant

impact on the audit quality (Balsam et al., 2003; Becker et al., 1998;

Carey & Simnett, 2006; Ernstberger et al., 2020; Francis &

Krishnan, 1999; Francis & Wilson, 1988; Hossain et al., 2018; Knechel

et al., 2013; Simunic & Stein, 1987). Although the evidence in beha-

vioural finance strongly supports that SAD influences investor

decision-making abilities, it is not clear whether a similar behavioural

effect could be observed among auditors. Given that the audit quality

ensures financial statements' credibility, investors, regulators and

practitioners will be interested in knowing whether and to what

extent SAD influences auditors' work.

In this study, we investigate whether SAD impacts audit quality.

Research investigating human mood argues that negative mood

induces individuals to focus on negative signals. Consistent with the

theory, existing literature on SAD documents that SAD increases

Received: 8 June 2022 Revised: 22 December 2022 Accepted: 8 January 2023

DOI: 10.1111/ijau.12304

Int J Audit. 2023;27:109–129. wileyonlinelibrary.com/journal/ijau © 2023 John Wiley & Sons Ltd. 109

pessimism and risk averseness among capital market participants

(Kamstra et al., 2003). We extend this theory to auditors and posit

that auditors would be risk-averse and lower their threshold of

aggressive reporting choices under the influence of SAD. Extant

research associates conservative auditing with higher audit quality

(Becker et al., 1998). Consequently, we expect that audit quality will

be higher when SAD induces negative emotions among auditors.

Alternatively, SAD could negatively affect an auditor's cognitive

ability and work efficiency. Specifically, we argue that the lower

energy level and less ability to concentrate at work during the SAD

period would reduce auditors' diligence and effort in auditing. DeHaan

et al. (2017) document that unpleasant weather lowers analysts'

response to an earnings announcement, thus implying that circum-

stances that trigger negative moods lower efficiency and productivity

at work. In the context of auditing, Li, Wu, and Zhang (2021) docu-

ment that air pollution, an unpleasant circumstance that triggers nega-

tive emotions among auditors, affects auditors' work productivity and

lowers audit quality. Thus, there is a possibility that audit quality will

be lower when SAD triggers negative emotions among auditors. Over-

all, it is still an empirical question of how SAD affects audit quality.

We use a sample of 21,224 US firm-year observations from 2003

to 2019 to analyse the effect of SAD on audit quality. To capture the

level of SAD during the audit period, which is defined as the calendar

days from the fiscal year-end to the audit report's signing date, we

use the average SAD hours during the audit period. Following Kam-

stra et al. (2003) approach, SAD hours are measured as the amount of

time between sunset and sunrise of a day at the audit office location.

We adopt absolute discretionary accruals and restatements to proxy

for audit quality. Both univariate and multivariate results show that

the firms have lower absolute discretionary accruals and less likeli-

hood of restatements when the average SAD hours of their audit

period are high. In economic terms, one standard deviation increase in

the average SAD hours of the audit period reduces our sample firms'

absolute discretionary accruals (the likelihood of restatements) by

approximately 5.5% (10.95%).

2

These findings are robust to the alter-

nate proxy for SAD specification, alternate proxy for audit quality and

the use of a propensity-matched sample, an entropy-balanced sample,

a non-busy auditor subsample and a local auditor subsample.

Kamstra et al. (2003) document that the effect of SAD on the

stock returns is stronger during fall than in winter. Therefore, we

further examine whether SAD has an asymmetric effect on the

audit quality around the winter solstice. Contrary to Kamstra et al.

(2003) but similar to Dolvin et al. (2009), our findings show that the

effect of SAD on the audits completed in fall season is not signifi-

cantly different from audits completed in winter season. Next, since

the depressive effect of SAD on the auditor will be stronger in

northern states than in southern states of the United States, we

investigate whether the absolute discretionary accruals and the like-

lihood of restatements are lower if the audit offices are located in

the north compared with ones in the south. Consistent with our

expectation, we find that auditors audit more conservatively

(i.e. lower absolute discretionary accruals) if their offices are in the

north than those in the south.

We also run two additional tests to strengthen the scope of the

paper. In the first test, we examine if the SAD affects the audit quality

of expert auditors and non-expert auditors differently. Industry expert

auditors carry a reputation for providing higher audit quality (Balsam

et al., 2003; Krishnan, 2003; Lim & Tan, 2008; Reichelt &

Wang, 2010). As a result, we posit that if SAD affects the perceived

risk of expert auditors, they will be less willing to accept aggressive

reporting choices than their counterparts. Our results show that SAD

does not affect expert auditors differently from non-expert auditors.

Financial statements are the joint product of client management

and the auditor. Since SAD may also affect management, an alternate

explanation of our baseline results could be that the lower absolute

discretionary accruals and likelihood of restatements are driven by the

management's conservative reporting and not by the auditor. In the

second test, we try to eliminate this possibility by controlling for cli-

ent's pre-audit financial reporting quality. Extant studies demonstrate

a positive association between audit committee monitoring and

reporting quality (Abbott et al., 2004). As a result, we restrict the sam-

ple to client firms with strong audit committees and rerun the baseline

regression. As an alternate test, we assume that the clients who

received a clean audit opinion last year will continue to have a good

pre-audit reporting quality in the current year. Accordingly, we restrict

the sample to client firms that received a clean audit opinion in the

prior year and rerun Model 1. We continue to find a negative associa-

tion between SAD and absolute discretionary accruals and restate-

ments. These findings support our conclusion that auditors' risk

averseness during the SAD period lowers absolute discretionary

accruals and the likelihood of restatements.

Our findings make two significant contributions. First, we extend

the literature of audit quality. Currently, vast studies investigate the

impact of firm-level, office-level or partner-level auditor characteris-

tics (Balsam et al., 2003; Becker et al., 1998; Carey & Simnett, 2006;

Ernstberger et al., 2020; Francis, 2004; Francis & Krishnan, 1999;

Francis & Wilson, 1988; Hossain et al., 2018; Knechel et al., 2013;

Simunic & Stein, 1987), audit committee and board characteristics

(Abbott et al., 2003; Chan et al., 2013; Collier & Gregory, 1996) and

CEO characteristics (Judd et al., 2017; Kalelkar & Khan, 2016;

Kalelkar & Xu, 2021; Kim et al., 2015) on audit quality. Comparatively,

research focusing on the factors influencing auditors' moods is limited

(e.g. Bhattacharjee & Moreno, 2002; Chung et al., 2008). Our findings

add to this sparse strand of audit quality literature by highlighting that

psychology of the auditor is an important determinant of audit

quality.

Second, our study extends the literature on the outcome of SAD.

Current studies on this topic have investigated the impact of SAD on

stock returns (Garrett et al., 2005; Kamstra et al., 2003,2009),

analysts' earnings forecasts (Dolvin et al., 2009; Lo & Wu, 2018) and

earnings response coefficient (Lin, 2015). To our knowledge, we are

the first study to explore and show that SAD affects audit outcomes.

From a practical standpoint, our findings should interest investors and

regulators who have expressed concern about the financial reporting

quality, especially since the Enron debacle. Our findings should

increase the confidence of investors and regulators in financial

110 KALELKAR ET AL.