Abstract
We examine whether and how engagements with bankrupt clients (i.e., bankruptcy experiences) affect auditors' behavior in future engagements. Using a large sample of Swedish auditors-in-charge (AICs), we find that AICs' bankruptcy experiences are positively related to the issuance of going-concern opinions to financially distressed clients, audit fees, and clients' earnings quality. Our evidence implies that such experiences increase AICs' conservatism and professional skepticism and contribute to higher audit quality. We also show that AICs' bankruptcy experiences are associated with more conservative client management strategies – the lower (higher) likelihood of accepting (resigning from) financially distressed clients. Furthermore, we find that the impact of bankruptcy experiences on AICs' decision-making is stronger when those experiences are more salient and recent, as well as when they are followed by a sanction. Overall, our findings indicate that AICs who have experienced client bankruptcies deliver higher audit quality and exhibit a greater level of conservatism in client selection, providing novel evidence on how individual auditors' auditing styles are shaped by their professional experiences.