Although theory suggests that companies would rationally select into audit even if it were not a legal requirement, many countries impose mandatory audits. This is arguably due to an audit having elements of a public good, which may result in not enough audits being purchased without regulatory...

We argue that auditors are more conservative when they face high estimation risk. To test this, we examine how auditors respond to the estimation risk associated with predicting the future bankruptcy outcomes of their audit clients. Consistent with auditors being more conservative when they face...