What client and auditor attributes are associated with auditors' decision to require adjustments to pre-audit financial statements?

An important outcome of the audit process is the adjustments to the pre-audit financial statements prepared by managers. We provide empirical evidence on the determinants of auditors’ decision to require adjustments to the pre-audit financial statements. We find that clients with higher pre-adjusted discretionary accruals are more likely to receive downward adjustments to pretax income and clients with lower effective tax rates are more likely to receive upward adjustments to taxes payable. However, auditors are less likely to require downward income adjustments when their clients’ pre-adjusted return on equity is just above the critical cutoff that qualifies them for stock listing or new share offering. Our results support the notion that auditors correct for management bias, but not to the extent to cause severe adverse consequences to their clients. Adjustments of both income and tax obligation are also influenced by several attributes of signatory auditors including industry specialization, independence from the client, the rank, and gender of the auditor.