Auditor and FASB Responsibilities for Representing Underlying Economics—What U.S. Standards Actually Say

2018 ◽  
Vol 32 (3) ◽  
pp. 83-90 ◽  
Author(s):  
Zoe-Vonna Palmrose ◽  
William R. Kinney
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Financial Statements ◽  
Financial Reporting Quality ◽  
Or Practice

SYNOPSIS Does the auditor's responsibility under U.S. authoritative guidance extend to providing assurance of financial reporting quality—specifically whether financial statements “faithfully reflect the firm's underlying economics”—after the auditor has concluded that financial statements are fairly presented in conformity with GAAP, in all material respects? The question arises because DeFond and Zhang (2014) state such a view and cite U.S. authoritative guidance as support. We review SEC, PCAOB, and FASB guidance and other sources and find no authoritative support for DeFond and Zhang's (2014) view. We also find that the PCAOB explicitly recognizes the lack of objective criteria that would be necessary to evaluate financial reporting quality beyond application of GAAP to events and transactions. Further, we find no evidence that practicing auditors do (separately) assess or assure that financial statements faithfully reflect the entire firm's underlying economics. Overall, these findings suggest DeFond and Zhang (2014) express a personal (and impracticable) normative view and not the auditor's actual responsibility or practice under extant U.S. standards. More broadly, results reinforce the importance of defining and measuring audit quality based on the auditor's actual responsibilities and the importance of accurately characterizing authoritative guidance and practice for scholarship regarding complex and multifaceted matters, including audit quality.

Does Auditor Explanatory Language in Unqualified Audit Reports Indicate Increased Financial Misstatement Risk?

2014 ◽  
Vol 89 (6) ◽  
pp. 2115-2149 ◽  
Author(s):  
Keith Czerney ◽  
Jaime J. Schmidt ◽  
Anne M. Thompson
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Positive Association ◽  
Financial Statements ◽  
Financial Statement ◽  
Financial Reporting Quality ◽  
Accounting Principles ◽  
Client Relationship ◽  
Financial Misstatement ◽  
Audit Reports

ABSTRACT According to auditing standards, explanatory language added at the auditor's discretion to unqualified audit reports should not indicate increased financial misstatement risk. However, an auditor is unlikely to add language that would strain the auditor-client relationship absent concerns about the client's financial statements. Using a sample of 30,825 financial statements issued with unqualified audit opinions during 2000–2009, we find that financial statements with audit reports containing explanatory language are significantly more likely to be subsequently restated than financial statements without such language. We find that this positive association is driven by language that references the division of responsibility for performance of the audit, adoption of new accounting principles, and previous restatements. In addition, we find that (1) “emphasis of matter” language that discusses mergers, related-party transactions, and management's use of estimates predicts restatements related to these matters, and that (2) the financial statement accounts noted in the explanatory language typically correspond to the accounts subsequently restated. In sum, our results suggest that present-day audit reports communicate some information about financial reporting quality.

Understanding the Relation between Financial Reporting Quality and Audit Quality

2016 ◽  
Vol 35 (4) ◽  
pp. 1-22 ◽  
Author(s):  
Lisa Milici Gaynor ◽  
Andrea Seaton Kelton ◽  
Molly Mercer ◽  
Teri Lombardi Yohn
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Recursive Relation ◽  
Financial Reporting Quality ◽  
Task Environment ◽  
Future Research

SUMMARY A primary goal of both financial reporting research and audit research is to understand the determinants of quality, and researchers in both areas have identified a wide set of variables that enhance or impair quality. In this paper, we define financial reporting quality and audit quality and use a person/task/environment framework to summarize prior findings on the determinants of each. We use this framework to discuss the links between the financial reporting and audit academic literatures and highlight the recursive relation between financial reporting quality and audit quality. Our discussion provides insights and suggestions on how financial reporting and audit researchers can learn from each other to improve our collective understanding of financial reporting and audit quality. Using this framework, we also identify opportunities for future research.

Corporate Social Responsibility and Financial Reporting Quality:Evidence from Restatements

2020 ◽  
Author(s):  
Yi-Hung Lin ◽  
Hua-Wei (Solomon) Huang ◽  
Mark E. Riley ◽  
Chih-Chen Lee
Keyword(s):  
Financial Reporting ◽  
Negative Relationship ◽  
Reporting Quality ◽  
Financial Statements ◽  
Financial Statement ◽  
Financial Reporting Quality ◽  
Csr Reporting ◽  
Corporate Social ◽  
Reporting Environment ◽  
The Relationship

We find a negative relationship between aggregate CSR scores and the probability that firms restated financial statements over the period 1991-2012. We then break that period into three sub-periods in order to determine whether the relationship holds for all three sub-periods. During the sub-periods of 1991-2001 and 2002-2005, the negative CSR score - restatement probability relationship holds. The negative relationship disappears in the 2006-2012 sub-period. Additional analyses indicate CSR scores are significantly higher in the 2006-2012 sub-period, suggesting the disappearance of the relationship between aggregate CSR scores and financial statement quality may relate to changes in CSR assessments and the CSR reporting environment. Our findings update the literature linking CSR scores and financial reporting quality and identify the need for further research as to the reasons the link between these constructs disappeared.

scholarly journals A literature review on the impact of IAS/IFRS and regulations on quality of financial reporting

2016 ◽  
Vol 6 (4) ◽  
pp. 102-114 ◽  
Author(s):  
Newman Wadesango ◽  
Edmore Tasa ◽  
Khazamula Milondzo ◽  
Ongayi Vongai Wadesango
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Reporting Quality ◽  
Financial Statements ◽  
Conclusive Evidence ◽  
Financial Reporting Quality ◽  
International Accounting Standards ◽  
Ifrs Adoption ◽  
The Impact

The International Accounting Standards Board (IASB) in its objectives and preamble, presume that IFRS adoption and perceived compliance to regulatory framework is associated with increased financial reporting quality. Based on these assumptions, this desktop study reviewed several documents to determine whether the IFRS adoption has led to increased financial reporting quality in Zimbabwe. The researchers reviewed literature on how the IAS/IFRS and regulations affect the financial reporting quality of listed companies. The factors around IFRS adoption were identified (mandatory, voluntary and convergence) and discussed in relation to the financial reporting quality. Evidence from previous studies conducted in line with this same issue shows that there is no conclusive evidence on how IFRS and regulations affect the financial reporting quality. Issues to be addressed in further studies include the importance of financial statements prepared under IFRS framework and the importance of compliance with accounting and auditing requirements.

scholarly journals Relevance of financial reporting quality - Theory and practice in Vietnamese enterprises

2017 ◽  
Vol 1 (Q2) ◽  
pp. 119-128
Author(s):  
Thuan Quoc Pham
Keyword(s):  
Conceptual Framework ◽  
Financial Reporting ◽  
Accounting Standards ◽  
Reporting Quality ◽  
Professional Associations ◽  
Financial Statements ◽  
Theory And Practice ◽  
Financial Information ◽  
Financial Reporting Quality

Financial reporting quality is one the most interesting topics which draw a great deal of attention to researchers and scientists in the field of accounting (Céline Michailesco, 2010). In the review of research on financial information from 1980 to 2016, Pham (2016) found that characteristics of useful financial information are relatively diverse with as many as 15 attributes being identified. In addition, he also found that all research in any period has employed the characteristics published by professional associations such as American Institute of Accountants, Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB as theoretical basis. Research on the quality of financial information is diverse yet have many things in common, above all is the Relevance characteristic which considered to be the basic qualitative component of the quality of financial information in financial statements. Conceptual Framework officially issued by FASB & IASB in 2010 (FASB & IASB 2010) has further confirmed Relevance is the basic quality component of financial information. Compared with previous announcements, there has been a considerable change in the criteria and attributes used to evaluate the appropriateness of Relevance characteristic of financial information in financial statements. This study aims at confirming the importance of the Relevance component in evaluating the quality of financial information, clarifyingg the characteristics of Relevance measurement before and after Conceptual Framework 2010 and constructing relevant scales as well as measuring the qualitative characteristic of Relevance among enterprises in Vietnam.

Factors Influencing KAM Reporting: A Structured Literature Review

2021 ◽  
Vol 19 (164) ◽  
pp. 743-758
Author(s):  
Teodora Porumbacean ◽  
◽  
Adriana Tiron-Tudor ◽  
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Financial Statements ◽  
Positive Influence ◽  
Financial Reporting Quality ◽  
Risk Level ◽  
Audit Report ◽  
Expectation Gap ◽  
Big Four ◽  
Relevant Factors

The disclosure of KAMs contribute to the increase of financial-reporting quality, the value of the audit report and implicit interest in it. Moreover, KAM’s disclosure has a positive influence over the expectation gap between the auditors and other users of the audit report and financial statements. This study aims to identify relevant drivers influencing the Key Audit Matters (KAMs) disclosed in the audit report, based on a review of the articles published in top accounting journals. Our results reveal the fact that the audited company itself especially influences the disclosure of the KAMs, emphasizing the size of the company, the complexity of the business, the applicable regulation of the industry in which the company operates, all of which impact the overall client-risk level. Other relevant factors are the accounting standards with which the company must comply and on which it must report, the audit company (‘Big Four’ or not) and the audited company’s location.

Audit committee ownership and audit report lag: evidence from Australia

2020 ◽  
Vol 28 (1) ◽  
pp. 96-125
Author(s):  
Md. Borhan Uddin Bhuiyan ◽  
Mabel D’Costa
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Reporting Quality ◽  
Financial Statements ◽  
Audit Committees ◽  
Financial Reporting Quality ◽  
Audit Report ◽  
Content Type ◽  
External Auditors ◽  
Using Data

Purpose This paper aims to examine whether audit committee ownership affects audit report lag. Independent audit committees are responsible for overseeing the financial reporting process, to ensure that financial statements are both credible and released to external stakeholders in a timely manner. To date, however, the extent to which audit committee ownership strengthens or compromises member independence, and hence, influences audit report lag, has remained unexplored. Design/methodology/approach This paper hypothesizes that audit committee ownership is associated with audit report lag. Further, the author hypothesize that both the financial reporting quality and the going concern opinions of a firm mediate the effect of audit committee ownership on audit report lag. Findings Using data from Australian listed companies, the author find that audit committee ownership increases audit report lag. The author further document that financial reporting quality and modified audit opinions rendered by external auditors mediate this positive relationship. The results are robust to endogeneity concerns emanating from firms’ deliberate decisions to grant shares to the audit committee members. Originality/value The study contributes to both the audit report timeliness and the corporate governance literatures, by documenting an adverse effect of audit committee ownership.

scholarly journals AN INVESTIGATION ON THE EFFECT OF AUDIT COMMITTEE ON FINANCIAL REPORTING QUALITY IN PRE AND POST IFRS ADOPTION: EVIDENCE FROM MALAYSIAN COMPANIES

2020 ◽  
Vol 8 (2) ◽  
pp. 25-35
Author(s):  
Citrawati Jatiningrum ◽  
Fauzi ◽  
Rita Irviani ◽  
Mujiyati ◽  
Shahanif Hasan
Keyword(s):  
Earnings Management ◽  
Empirical Evidence ◽  
Financial Reporting ◽  
Audit Committee ◽  
Audit Quality ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Ifrs Adoption ◽  
Significant Difference ◽  
The Relationship

Purpose of study: This study sought to investigate the effect of the audit committee on Financial Reporting Quality (FRQ), explicitly focuses on the period pre- and post-mandatory IFRS adoption in Malaysia. The Financial Reporting Quality in this study proxied by earnings management. Malaysian. Methodology: The sample study has covered 81 listed companies on Bursa Malaysia, with 567 observations, which examined the time of 2009 to 2015. The relationship was analyzed by statistical multiple regression linear methods and also examined the significance of differences between pre and post IFRS adoption by paired sample t-test. Result: The main finding reveals that the relationship between the audit committee and financial reporting quality after IFRS adoption in Malaysia has more significant. However, empirical evidence showed that the post period of mandatory IFRS evidently no significant difference level of earnings management practice. This result indicates that the IFRS adoption cannot reduce managerial discretion yet and the possibility for EM manipulation for Malaysian companies. Implication/Application: This finding has critical implications for regulators and policymakers, that the consequences of IFRS adoption do not increase the quality of financial reporting when EM practices still continue in the different forms. Novelty/Originality of this study: This study gives empirical evidence that there are differences in relationship level between audit quality and earnings management in the period before and after IFRS mandatory adoption in Malaysia companies.

scholarly journals Analysis of the effects of changes in Spanish auditing regulation on audit quality and its differential effect depending on the type of auditor

2019 ◽  
Vol 22 (2) ◽  
pp. 171-186 ◽  
Author(s):  
Elena Cabal-García ◽  
Javier De-Andrés-Suarez ◽  
Carlos Fernández-Méndez
Keyword(s):  
Financial Reporting ◽  
Public Interest ◽  
Differential Effect ◽  
Audit Quality ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Legal Reforms ◽  
Legal Enforcement ◽  
Per Se

The objective of this paper is to provide evidence on the effect of the reforms of the Spanish auditing legislation, enacted in 2002, 2010 and 2015, on audit quality. More specifically, we study whether the reforms had a differential effect depending on the type of auditor. To this end, the auditors were classified according to their size. We analyzed the specific case of non-financial listed Spanish companies which are considered as Public Interest Entities (PIEs). The main results indicate that none of the reforms caused an improvement in financial reporting quality. This could mean that legal reforms per se are not sufficient to achieve the intended objectives in countries with weak legal enforcement, as is the case of Spain. Because of this, it may be necessary to implement mechanisms to encourage auditors to apply the new rules. El objetivo de este trabajo es aportar evidencia sobre el efecto de las reformas de la legislación auditora española, efectuadas en 2002, 2010 y 2015, sobre la calidad de la auditoría y, más concretamente, sobre si las mismas tuvieron un efecto diferencial en función del tipo de auditor. Para ello, los auditores fueron clasificados en función de su tamaño. Se analizó el caso concreto de las empresas españolas cotizadas no financieras, colectivo que tiene la consideración de Entidades de Interés Público (EIP). Los resultados principales indican que ninguna de las reformas causó mejoras en la calidad de la información financiera. Esto podría significar que las reformas legales per se no son suficientes para lograr los objetivos previstos en países con débil aplicación legal, como es el caso de España. Por ello, podría ser necesario implementar mecanismos para alentar a los auditores a aplicar las nuevas reglas.

Sign in / Sign up

Export Citation Format

Share Document