Auditor reporting to bank regulators: Effective regulation or regulatory overreach?

Despite concerns that profit-sharing plans might have a detrimental effect on audit quality, there is little empirical evidence on this issue. We examine the effects of the type of profit-sharing plan, level of client importance, and auditor reinforcement sensitivity (joint sensitivity to rewards and punishments) on auditor reporting decisions. By relying on agency theory and reinforcement sensitivity theory, we posit that the joint effects of profit sharing and client importance on auditors' decisions are contingent on reinforcement sensitivity. In an experiment with 450 audit partners and managers, we manipulate type of profit-sharing plan and client importance, and measure extroversion and neuroticism. We find the highest audit quality when profit sharing is based on firm performance, client importance is low, and reinforcement sensitivity is high. Thus, instead of just modifying the type of profit-sharing plans, it is the mix of economic incentives and personality traits that affect audit quality.

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The Effect of Auditor Reporting Choice and Audit Committee Oversight on Management Financial Disclosures

The Accounting Review ◽

10.2308/tar-2016-0246 ◽

2021 ◽

Author(s):

Stephen H. Fuller ◽

Jennifer R. Joe ◽

Benjamin L. Luippold

Keyword(s):

Audit Committee ◽

Financial Statements ◽

Audit Committees ◽

Auditor Judgment ◽

Joint Effects ◽

Financial Disclosures ◽

Auditor Reporting ◽

Management Disclosures

We investigate the joint effects of auditor's reporting choice and audit committee effectiveness on management disclosures about complex estimates. A new PCAOB standard requires auditors to report on Critical Audit Matters (CAMs): issues "communicated or required to be communicated to the audit committee" about accounts or disclosures that (1) "are material to the financial statements" and (2) "involved especially challenging, subjective, or complex auditor judgment" (PCAOB 2017a, 11). Consistent with investor arguments, we find that audit committee effectiveness and more detailed CAM reporting encourage managers' disclosures of the risk underlying complex estimates. When the auditor's report is more informative about a complex estimate and the audit committee is more effective, management's related financial disclosures are more forthcoming. However, less informative auditor disclosures or more effective audit committees alone do not prompt greater management disclosure. Thus, expanded auditor reporting and more effective audit committees, together, can enhance the disclosures investors value.

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The effect of real activities manipulation on going concern audit opinions for financially distressed companies

Review of Accounting and Finance ◽

10.1108/raf-09-2016-0135 ◽

2018 ◽

Vol 17 (4) ◽

pp. 514-539

Author(s):

Hongkang Xu ◽

Mai Dao ◽

Jia Wu

Keyword(s):

Audit Quality ◽

Positive Association ◽

Content Type ◽

Going Concern ◽

Accruals Management ◽

Reporting Decisions ◽

Going Concern Opinion ◽

Distressed Firms ◽

Real Activities Manipulation ◽

Auditor Reporting

Purpose This study aims to examine the effect of real activities manipulation (RAM) on auditors’ decision of issuing going concern (GC) opinions for distressed companies. Design/methodology/approach This study estimates and examines three types of RAM: reduction of discretionary expenses, sales manipulation and overproduction. It investigates the effect of RAM on auditor reporting conservatism by including the three measures of RAM methods in logistic regressions that explain the issuance of going concern opinions. The authors perform the analysis specifically on distressed firms for 2004-2013 period. Findings This study finds a significant and positive association between RAM and the likelihood of receiving going concern opinion in the financial distressed firm sample, suggesting that client’s abnormal business activity affects the auditor reporting conservatism. Practical implications This study provides evidence that auditors make going concern reporting decisions in consideration of the client’s abnormal operating decisions and management’s opportunism. Originality/value Recent literature argues that auditors have little recourse other than to resign if a client uses RAM to impact earnings or the financial statements, and hence the enhanced audit quality in the post-SOX period is due to the shift from using accruals management to RAM (Cohen et al., 2008; Chi et al., 2011; Kim and Park, 2014). The evidence provided in this study indicates that auditors report more conservatively (rather than simply resign) in response to the aggressive RAM.

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Auditor Reporting Requirements and Other Communication Considerations in a Single Audit

Government Auditing Standards and Single Audits ◽

10.1002/9781119449973.ch13 ◽

2017 ◽

pp. 321-385

Keyword(s):

Reporting Requirements ◽

Single Audit ◽

Auditor Reporting

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Does Audit Committee Accounting Expertise Help to Promote Audit Quality? Evidence from Auditor Reporting of Internal Control Weaknesses

Contemporary Accounting Research ◽

10.1111/1911-3846.12517 ◽

2019 ◽

Vol 36 (4) ◽

pp. 2521-2553 ◽

Cited By ~ 9

Author(s):

Ling Lei Lisic ◽

Linda A. Myers ◽

Timothy A. Seidel ◽

Jian Zhou

Keyword(s):

Internal Control ◽

Audit Committee ◽

Audit Quality ◽

Internal Control Weaknesses ◽

Auditor Reporting ◽

Accounting Expertise ◽

Quality Evidence

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Social Trust and Auditor Reporting Conservatism

Journal of Business Ethics ◽

10.1007/s10551-016-3366-5 ◽

2016 ◽

Vol 153 (4) ◽

pp. 1083-1108 ◽

Cited By ~ 3

Author(s):

Deqiu Chen ◽

Li Li ◽

Xuejiao Liu ◽

Gerald J. Lobo

Keyword(s):

Social Trust ◽

Auditor Reporting

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The moderating role of audit quality on the relationship between auditor reporting and earnings management: empirical evidence from Tunisia

EuroMed Journal of Business ◽

10.1108/emjb-03-2020-0024 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Fakhfakh Imen ◽

Jarboui Anis

Keyword(s):

Earnings Management ◽

Audit Quality ◽

Stock Exchange ◽

Generalized Least Squares ◽

Content Type ◽

Audit Opinion ◽

Before And After ◽

Audit Opinions ◽

Auditor Reporting ◽

The Relationship

PurposeThe purpose of this study is to examine the interrelationship between modified audit opinions and earnings management as measured by discretionary accruals and develop a thorough understanding regarding the moderating effect of audit quality on this relation.Design/methodology/approachThis study uses a sample of Tunisian listed firms on the Tunis Stock Exchange during 2006–2013. Four models are developed and tested by using panel logistic and Feasible Generalized Least Squares (FGLS) regressions.FindingsThe results show that earnings management increases the likelihood of receiving a modified audit opinions. Then firms receiving modified audit opinions manage earnings more than those receiving clean opinions. It is also discovered that audit quality moderates the relationship between audit opinion and earnings management.Practical implicationsThis paper contributes to the literature of both audit and management studies and represents the first effort to examine the relation between audit opinion and earnings management, with audit quality as a moderating variable.Originality/valueThis study extends existing research on earnings management and audit opinion. Thus, this study has the potential to help stakeholders, board of directors, regulators and auditors, who are related with enhancing the supervision of firms and reducing the opportunities given to managers, to engage in earnings management. It constitutes an addition to previous knowledge about audit opinion in the Tunisian context before and after revolution.

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Going Concern Designations and GAAP versus Non-GAAP Earnings Metrics

Issues in Accounting Education ◽

10.2308/iace-50298 ◽

2012 ◽

Vol 28 (1) ◽

pp. 77-92 ◽

Cited By ~ 1

Author(s):

James L. Bierstaker ◽

Thomas F. Monahan ◽

Michael F. Peters

Keyword(s):

Stock Price ◽

Potential Role ◽

Cash Flows ◽

Financial Accounting ◽

Master's Level ◽

Financial Accounting Standards Board ◽

Generally Accepted Accounting Principles ◽

Going Concern ◽

Public Company ◽

Auditor Reporting

ABSTRACT: Many students have not spent much time studying or contemplating the importance of non-GAAP (Generally Accepted Accounting Principles) earnings to the “Street.” Based on the facts of an actual company and utilizing the financial information drawn from this company's 10-K and Earnings Release, this case introduces students to the strengths and weaknesses of GAAP and non-GAAP earnings measures, and why the Street might be more interested in cash and recurring earnings in attempting to predict movements in stock price. It also provides the instructor with an opportunity to discuss the dangers of allowing firms to emphasize earnings in their press releases that are not defined by an external authoritative body (such as the Financial Accounting Standards Board [FASB]), and how this can hurt the consistency and reliability of reporting. This is an important discussion, since regulators have recently formally proposed to include non-GAAP measures in their overhaul of the auditor reporting model (Public Company Accounting Oversight Board [PCAOB] 2011). The case also familiarizes students with current auditing guidelines dealing with the going concern decision and the potential role that non-GAAP earnings can play in this decision. Thus, the three primary learning objectives are to teach students: (1) to apply going concern audit standards, (2) about the potential role of non-GAAP earnings in this decision—especially as a predictor of future cash flows, and (3) other issues associated with non-GAAP earnings. This topic is important, as auditors are frequently auditing companies that release non-GAAP earnings and/or have going concern issues. This case can be used in Intermediate and Auditing classes, as well as master's-level courses.

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