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An Extension of Anile and Nallebuff's Conservatism and Auditor‐Client Negotiations: Implementation of Auditor's Asymmetric Loss Function

Susan McCracken

Asian Review of Accounting

ISSN: 1321-7348

Article publication date: 1 January 2002

78

Abstract

Auditors and accountants have an accepted reputation of being conservative. However, Antle and Nalebuff (1991) conclude in their analytical model on auditor‐client negotiations that auditors are not conservative and that a conservative audit report is never issued. This paper extends the Antle and Nalebuff (1991) results. By replacing the Antle and Nalebuff (1991) assumption that an auditor has a symmetric loss function (financial statement overstatements have the same impact as financial statement understatements) with the assumption that an auditor has an asymmetric loss function (losses to an auditor for financial statement overstatement are greater than the losses of an equal understatement), I find that auditors can be conservative and that conservative audit reports are issued to the users.

Citation

McCracken, S. (2002), "An Extension of Anile and Nallebuff's Conservatism and Auditor‐Client Negotiations: Implementation of Auditor's Asymmetric Loss Function", Asian Review of Accounting, Vol. 10 No. 1, pp. 121-146. https://doi.org/10.1108/eb060753

Publisher

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MCB UP Ltd

Copyright © 2002, MCB UP Limited

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