Auditors′ reporting decisions for accounting estimates

1995 ◽  
Vol 10 (5) ◽  
pp. 27-36 ◽  
Author(s):  
Steven Kaplan ◽  
Philip M.J. Reckers
Keyword(s):  
Accounting Estimates ◽  
Reporting Decisions

What Happens When Managers Are Informed? Effects of Critical Audit Matter Awareness and Auditor Relationship on Managers' Accounting Estimates

2021 ◽  
Author(s):  
Hun-Tong Tan ◽  
Feng Yeo
Keyword(s):  
Social Distance ◽  
Working Relationship ◽  
Distant Relationship ◽  
Client Relationship ◽  
Accounting Estimates ◽  
Reporting Decisions

We examine how managers' accounting estimates are affected by whether they are informed about an impending critical audit matter (CAM) disclosure from a close or distant auditor. A close (distant) auditor is one who has a smaller (greater) social distance from the client in terms of their working relationship. We predict and find that being informed about an impending CAM by a close (distant) auditor leads to more (less) aggressive estimates than if managers are not informed. With a close auditor-client relationship, managers perceive a CAM disclosure as forewarning investors about estimate subjectivity, thus providing a moral license to report more aggressively. With a distant relationship, a CAM disclosure does not provide a moral license but signals greater auditor scrutiny, which leads to less aggressive reporting. Our results inform regulators and standard setters about the effects of CAM on managers' reporting decisions in the presence of a close auditor-client relationship.

The Usefulness of Accounting Estimates

2008 ◽  
Author(s):  
Baruch Itamar Lev ◽  
Siyi Li ◽  
Theodore Sougiannis
Keyword(s):  
Accounting Estimates

Does the Mandatory Adoption of IFRS Improve the Association between Accruals and Cash Flows? Evidence from Accounting Estimates

2018 ◽  
Vol 33 (1) ◽  
pp. 39-59
Author(s):  
Jimmy F. Downes ◽  
Tony Kang ◽  
Sohyung Kim ◽  
Cheol Lee
Keyword(s):  
Financial Reporting ◽  
Cash Flows ◽  
Data Availability ◽  
The European Union ◽  
Accounting Quality ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Accounting Estimates ◽  
Accounting Accruals ◽  
Future Cash Flows

SYNOPSIS We investigate the effect of mandatory International Financial Reporting Standards (IFRS) adoption in the European Union on the association between accounting estimates and future cash flows, a key concept of accounting quality within the International Accounting Standard Board conceptual framework. We find that the predictive value of accounting estimates improves after IFRS adoption. This improvement is largely driven by specific types of accounting estimates, such as accounts receivable, depreciation, and amortization expense. We also find that the improvement is concentrated in countries with larger differences between pre-IFRS domestic GAAP and IFRS. Our findings suggest that IFRS allow managers to exercise their judgment to provide information about future cash flows through the more subjective/judgmental portion of accounting accruals. JEL Classifications: M16; M49; O52. Data Availability: The data used in this study are from public sources identified in the study.

The Effects of Profit-Sharing Plans, Client Importance, and Reinforcement Sensitivity on Audit Quality

2020 ◽  
Author(s):  
Herman van Brenk ◽  
Barbara Majoor ◽  
Arnold M. Wright
Keyword(s):  
Agency Theory ◽  
Detrimental Effect ◽  
Audit Quality ◽  
Profit Sharing ◽  
Economic Incentives ◽  
Reinforcement Sensitivity Theory ◽  
Sensitivity Theory ◽  
Reinforcement Sensitivity ◽  
Reporting Decisions ◽  
Auditor Reporting

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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