Effect of joint auditor pair on Conservatism: Evidence from impairment tests

Using a sample of firms from France, where the law requires use of two auditors, we examine the effect of auditor pair composition on overall measures of unconditional and conditional conservatism, as well as on a specific measure of conditional conservatism, i.e., impairment loss. We use game theory to demonstrate that pairs of Big 4 auditors facing similar incentives are likely to have lower auditor independence, leading to lower conservatism. Conversely, pairs of a Big 4 and a Small auditor increase Big 4 auditors' incentives to be conservative. We document that Big 4-Small auditor pairs are more unconditionally and conditionally conservative using market-to-book ratio and Basu's (1997) measure of conservatism, are more likely to book impairments when operating performance is low, and make more transparent impairment-related disclosures. Our results inform regulators who are considering requiring joint audit to improve audit quality.