Financial Statement Disaggregation and Auditor Effort

2021 ◽  
Author(s):  
Matthew Beck ◽  
Matthew Glendening ◽  
Chris E. Hogan
Keyword(s):  
Positive Association ◽  
Financial Statements ◽  
Audit Fees ◽  
Financial Statement ◽  
Litigation Risk ◽  
Significant Positive Association ◽  
Material Line

We examine the consequences of firms' disaggregation choices for auditor effort and audited financial statements. We document a significant positive association between disaggregation and audit fees, our proxy for auditor effort. Using separate measures of disaggregation of smaller line items versus larger, obviously material, line items, we provide evidence that one of the avenues through which disaggregation may increase auditor effort is through changes in auditors' assessments of materiality for smaller line items, especially when financial statement scrutiny is high. We also find disaggregation (and the audit fees associated with disaggregation) constrain the ability of managers to manipulate earnings in the audited financial statements compared to the unaudited financial statements, suggesting the fee response to disaggregation is due to auditor effort. Lastly, we provide evidence that our results are not fully explained by client litigation risk or other client attributes driving disaggregation choices.

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.

scholarly journals Influencing Factors of Stock Price in Nepal

NCC Journal ◽  
2019 ◽  
Vol 4 (1) ◽  
pp. 113-120
Author(s):  
Krishna Bahadur Thapa
Keyword(s):  
Interest Rate ◽  
Stock Market ◽  
Influencing Factors ◽  
Stock Price ◽  
Stock Exchange ◽  
Positive Association ◽  
Share Price ◽  
Financial Statement ◽  
Inverse Association ◽  
Significant Positive Association

This paper explores the influencing factors of stock price in Nepal (with reference to Nepalese commercial banks) listed on the Nepal Stock Exchange Ltd. over the period of 2008 to 2018AD. The information were collected from questionnaire and financial statement of concerned organizations and analyzed using simple linear regression model. The conclusions of the work revealed that earning per share (EPS), dividend per share (DPS), effective rules and regulations, market whims and rumors, company profiles and success depend upon luck have the significant positive association with share price while interest rate (IR) and price to earnings ratio (PER), showed the significant inverse association with share price. Further, accessibility of liquidity, fundamental and technical analysis stimulates the performance of the Nepalese stock market. More importantly, stock market has been found to respond significantly to changes in dividend and interest rate.

Auditors’ response to readability of financial statement notes

2020 ◽  
Vol 28 (3) ◽  
pp. 463-480
Author(s):  
Mahdi Salehi ◽  
Mahmoud Lari Dasht Bayaz ◽  
Shaban Mohammadi ◽  
Mohammad Seddigh Adibian ◽  
Seyed Hamed Fahimifard
Keyword(s):  
Stock Exchange ◽  
Financial Statements ◽  
Audit Fees ◽  
Financial Statement ◽  
Audit Report ◽  
Financial Reports ◽  
Statistical Population ◽  
Content Type ◽  
Listed Firms ◽  
Going Concern Opinion

PurposeThe main objective of the present study is to assess the potential impact of readability of financial statement notes on the auditor's report lag, audit fees and going concern opinion (GCO).Design/methodology/approachThe statistical population of this study includes all listed firms on the Tehran Stock Exchange (TSE) for the period of 2012–2017. The systematic elimination method is used for sampling and multiple regression and EViews software are used for testing the hypothesis models.FindingsThe obtained results show that there is a significant and positive relationship between audit report lags and readability of financial statements. Moreover, it is also revealed that readability of financial statements is positively associated with audit fees. Furthermore, the findings suggest a negative correlation between readability indexes and issuing GCOs, denoting hard-to-read statements is considered as a risk factor by auditors. Finally, the observations of our robustness tests suggest that the association between audit report lag and readability of financial statements is robust.Originality/valueThis is the first conducted investigation concerning auditor's response to the readability of financial statement notes in TSE. The outcome of current paper may pave the way for revising and developing Iranian accounting standards in order to give a fairer and clearer picture of financial reports.

Income Conservatism in the U.S. Technology Sector

2011 ◽  
Vol 25 (2) ◽  
pp. 285-314 ◽  
Author(s):  
Uday Chandra
Keyword(s):  
Financial Statements ◽  
Cash Flows ◽  
Data Availability ◽  
Financial Statement ◽  
Litigation Risk ◽  
Technology Sector ◽  
Technology Firms ◽  
Conservative Accounting ◽  
Accounting Accruals ◽  
The U.S

SYNOPSIS I investigate the extent and nature of income conservatism in the financial statement numbers of firms in the U.S. technology sector. Technology firms are predicted to have greater income conservatism than other U.S. firms because they are subject to both higher shareholder litigation risk and conservative accounting standards such as SFAS 2. In the absence of a generally accepted measure of conservatism, I examine several proxies, including loss incidence and accounting rates of return, operating cash flow and nonoperating accrual levels, and regression coefficients from the earnings-return model in Basu (1997). Relative to other companies, technology firms' earnings are characterized by higher (and intertemporally increasing) levels of both conditional and unconditional conservatism. These differences are both statistically and economically significant. Further analysis suggests that technology firms' higher conservatism results primarily from lower operating cash flows due to R&D expensing and more income-decreasing accounting accruals linked to litigation risk. The results of this study are potentially useful to financial analysts, researchers, regulators, managers, and other users of financial statements. Data Availability: Data are available from public sources.

Audit Fees, Nonaudit Fees, and Auditor Reporting on Stressed Companies

2003 ◽  
Vol 22 (2) ◽  
pp. 53-69 ◽  
Author(s):  
Marshall A. Geiger ◽  
Dasaratha V. Rama
Keyword(s):  
Audit Committee ◽  
Positive Association ◽  
Audit Fees ◽  
Manufacturing Companies ◽  
Significant Positive Association ◽  
Going Concern ◽  
Reporting Decisions ◽  
Nonaudit Services ◽  
Audit Opinions ◽  
Auditor Reporting

The SEC and legislators have expressed concerns that independence may be negatively impacted if auditors perform significant nonaudit services for their audit clients, and that providing lucrative nonaudit services to clients may make it more likely that auditors will “see things the client's way.” Such concerns are particularly salient in the context of issues that involve significant auditor judgment, as in the case of reporting decisions related to going-concern uncertainties for financially stressed clients. In this study we examine the association between the magnitude of audit and nonaudit fees and auditor report modification decisions for financially stressed manufacturing companies. In our analysis we control for financial stress, company size, reporting lag, default status, audit committee effectiveness, and management plans. The results indicate a significant positive association between the magnitude of audit fees and the likelihood of receiving a going-concern modified audit opinion, but we find no significant association between nonaudit fees and audit opinions. Additional analyses also find no significant relationship between the ratio of nonaudit service fees to audit fees and reporting decisions, and indicate that our results are robust across alternative model, variable, and sample specifications. We also control for the potential endogeneity of audit opinions, audit fees, and nonaudit fees, and find the same positive association of audit fees with opinions, but no association between nonaudit fees and audit opinions. Overall, we find no evidence of a significant adverse effect of nonaudit fees on auditor reporting judgments for our sample of distressed companies.

The Association between Audit Partner Rotation and Audit Fees: Empirical Evidence from the Australian Market

2015 ◽  
Vol 35 (1) ◽  
pp. 181-197 ◽  
Author(s):  
Jenny Stewart ◽  
Pamela Kent ◽  
James Routledge
Keyword(s):  
Empirical Evidence ◽  
Positive Association ◽  
Audit Fees ◽  
First Year ◽  
Significant Positive Association ◽  
Audit Market ◽  
Second Year ◽  
Audit Partner Rotation

SUMMARY We examine the relation between audit partner rotation and audit fees for a sample of Australian firms from 2007 to 2010. We find a significant positive association between audit fees and partner rotation in the year of rotation. The association persists in the first year post rotation and to a lesser extent in the second year post rotation. Our analysis suggests that higher audit fees are associated with both mandatory and voluntary partner rotation. However, when we divide the sample into large global clients, mid-level clients, and small local clients, we find that mandatory and voluntary rotation are associated with higher audit fees for large global clients, while only voluntary rotation is associated with higher audit fees for small local clients. We do not find an association between partner rotation and audit fees for mid-level clients. Our study suggests that the extent to which firms are able to pass on the costs of partner rotation varies across different segments of the audit market.

Monitoring by Auditors: The Case of Public Housing Authorities

2011 ◽  
Vol 86 (4) ◽  
pp. 1289-1319 ◽  
Author(s):  
Barbara Murray Grein ◽  
Stefanie L. Tate
Keyword(s):  
At Risk ◽  
Public Housing ◽  
Financial Statements ◽  
Financial Information ◽  
Financial Data ◽  
Financial Statement ◽  
Litigation Risk ◽  
Management Incentives ◽  
Reporting Requirements ◽  
Big 4

ABSTRACT We take advantage of the unique reporting requirements of nonprofit public housing authorities (PHAs) to study the effect of audits on financial information both generally and when there are management incentives to misreport financial data. There is little prior research on the effect of audit adjustments in nonprofit settings and conflicting research on how auditors react to management's incentives to misreport. We identify potential financial statement areas at risk of manipulation based on incentives specific to public housing authorities. Using pre- and post-audit financial data for almost 3,600 PHAs across seven years, we find that auditors make economically and statistically significant adjustments to PHA financial statements. In addition, we find evidence that audits appear to reduce potential management bias, particularly to reduce risks of overstatement. Overall, audits appear to matter in this nonprofit, low-litigation risk setting where there is a large concentration of non-Big 4 auditors.

Abnormal Audit Fees and Restatements

2012 ◽  
Vol 31 (1) ◽  
pp. 79-96 ◽  
Author(s):  
Alan I. Blankley ◽  
David N. Hurtt ◽  
Jason E. MacGregor
Keyword(s):  
Internal Control ◽  
Financial Statements ◽  
Audit Fees ◽  
Financial Statement ◽  
Prior Work ◽  
Audit Risk ◽  
Negatively Associated ◽  
Control Quality ◽  
Sarbanes Oxley ◽  
The Relationship

SUMMARY We investigate the relationship between audit fees and subsequent financial statement restatements in the years following the Sarbanes-Oxley Act of 2002 (SOX). After controlling for internal control quality, we find that abnormal audit fees are negatively associated with the likelihood that financial statements are subsequently restated. This result conflicts with prior work that finds that audit fees are positively associated with future restatements. Overall, our evidence is consistent with the notion that restatements reflect low audit effort or underestimated audit risk in the periods leading up to the restatement year.

scholarly journals Creating Financial Statements For Start-Ups

2020 ◽  
Vol 8 (1) ◽  
pp. 104-114
Author(s):  
Tanneru Anusha ◽  
Nedunuri Sushma ◽  
M B Sai Rohit ◽  
A Akhil
Keyword(s):  
Research And Development ◽  
Positive Association ◽  
Financial Statements ◽  
Financial Statement ◽  
High Tech ◽  
Stages Of Development ◽  
Association Frequency ◽  
Intangible Investments ◽  
Start Ups ◽  
Funding Level

This paper represents the sample of entrepreneurs who are in the process of starting a business. At investigates the determinants of financial projections and statements in start-ups. The predictions information in economics is consistent. There is a positive association frequency of financial statement preparation concerning the use of outside funding, level competition, and venture scale. There are alternative influences and suggestions that benefit in reducing competition and uncertainty in fundamental variations to prepare financial statements. For instance, cash statements are more important for start-ups, and frequency varies among different financial statements with products in earlier stages of development and with greater competition. In contrast to this financial statements projections and regular forecasts of sales by start-ups are positively associated with the importance of intangible investments such as parents, research, and development. The start-ups in high –tech industries are used for projections. 

Convertible debt usage and the pricing of audit services

2021 ◽  
Author(s):  
Henri Akono ◽  
Heeick Choi ◽  
Khondkar Karim
Keyword(s):  
Functional Form ◽  
Positive Association ◽  
Audit Fees ◽  
Market Valuation ◽  
Litigation Risk ◽  
Business Risk ◽  
Convertible Debt ◽  
The Public ◽  
Earnings Per Share ◽  
Public Company

This study examines the association between convertible debt usage and the pricing of audit services. We test the (nondirectional) hypothesis that convertible debt usage is associated with audit effort and therefore fees, due to its association with client business risk and its dilutive effect on earnings per share. We find a positive association between audit fees and convertible debt, suggesting that auditors view convertible debt as a source of risk. We also find that audit fees related to convertible debt are sensitive to CEO bonus incentives and to market valuation incentives. Our results suggest that following the Public Company Accounting Oversight Board (PCAOB) regulation, auditors exert greater effort on convertible debt, but no additional effort on straight debt. Our inferences are robust to using a change in audit fees specification, controlling for litigation risk, and controlling for functional form misspecification.

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