Auditors' Consideration of Material Income-Increasing versus Material Income-Decreasing Items during the Audit Process

2012 ◽  
Vol 32 (2) ◽  
pp. 33-51 ◽  
Author(s):  
Naman K. Desai ◽  
Gregory J. Gerard
Keyword(s):  
Cognitive Effort ◽  
Data Availability ◽  
Litigation Risk ◽  
Audit Process ◽  
The Future ◽  
Versus Material ◽  
Poor Memory

SUMMARY: We examine how auditors' consideration of material items is affected by each item's directional impact on income. Prior research indicates that auditors face greater litigation risk for non-detection of fraudulent income-increasing items compared to income-decreasing items. Therefore, we expect that auditors will spend greater cognitive effort evaluating material income-increasing (as opposed to income-decreasing) items, resulting in superior memories for such items. However, in an effort to direct auditors' attention to both increasing and decreasing material items, we manipulate whether or not auditors were asked to form expectations about the future effects of material items. Our results indicate that auditors' memories for income-increasing items are significantly greater than that for income-decreasing items when auditors are not asked to form expectations about the future effects of the items. However, this difference is not observed when auditors are asked to form expectations about future effects of each item. Furthermore, our results indicate that auditors are less likely to refer back to the work papers to verify the accuracy of income-decreasing items compared to income-increasing items. This suggests that auditors are not inclined to compensate for their poor memory of income-decreasing items by referring to working papers. However, it also suggests that auditors compensate for the greater risk associated with income-increasing items by requiring greater verification of such items. Data Availability: Contact the authors.

Earnings Shortfalls and Strategic Profit Allocations in Segment Reporting

2019 ◽  
Vol 33 (4) ◽  
pp. 37-58 ◽  
Author(s):  
Timothy D. Haight
Keyword(s):  
Firm Value ◽  
Data Availability ◽  
Segment Reporting ◽  
Market Responses ◽  
Earnings Components ◽  
The Future ◽  
Earnings Performance ◽  
Profit Rates

SYNOPSIS I examine whether firms strategically classify earnings components when reporting bad earnings news. Specifically, I examine whether firms reporting small earnings shortfalls allocate profits across their business segments in a manner that understates the future implications and within-firm drivers of disappointing earnings performance. I find that firms reporting small earnings shortfalls transfer profits toward segments in which profit rates are more informative for firm value and away from segments that operate in industries with higher frequencies of bad earnings news. In addition, I find that shortfall shifting initially tempers negative market responses to shortfall news, but pricing effects reverse in the months following shortfall announcements. My findings suggest that firms strategically classify earnings components when reporting small earnings shortfalls and that strategic classifications temporarily affect the pricing of shortfall news. Data Availability: Data are available from public sources identified in this paper.

Do Managers Disclose or Withhold Bad News? Evidence from Short Interest

2018 ◽  
Vol 94 (3) ◽  
pp. 1-26 ◽  
Author(s):  
Dichu Bao ◽  
Yongtae Kim ◽  
G. Mujtaba Mian ◽  
Lixin (Nancy) Su
Keyword(s):  
Private Information ◽  
Voluntary Disclosure ◽  
Stock Price ◽  
Data Availability ◽  
Bad News ◽  
General Tendency ◽  
Litigation Risk ◽  
Novel Approach ◽  
Conflicting Evidence ◽  
Short Interest

ABSTRACT Prior studies provide conflicting evidence as to whether managers have a general tendency to disclose or withhold bad news. A key challenge for this literature is that researchers cannot observe the negative private information that managers possess. We tackle this challenge by constructing a proxy for managers' private bad news (residual short interest) and then perform a series of tests to validate this proxy. Using management earnings guidance and 8-K filings as measures of voluntary disclosure, we find a negative relation between bad-news disclosure and residual short interest, suggesting that managers withhold bad news in general. This tendency is tempered when firms are exposed to higher litigation risk, and it is strengthened when managers have greater incentives to support the stock price. Based on a novel approach to identifying the presence of bad news, our study adds to the debate on whether managers tend to withhold or release bad news. Data Availability: Data used in this study are available from public sources identified in the study.

The Effects of Auditors' Accessibility to “Tone at the Top” Knowledge on Audit Judgments

2014 ◽  
Vol 26 (2) ◽  
pp. 73-96 ◽  
Author(s):  
Regan N. Schmidt
Keyword(s):  
Mental Representation ◽  
Decision Aid ◽  
Audit Quality ◽  
Mental Representations ◽  
Data Availability ◽  
Control Environment ◽  
Audit Process ◽  
Mediation Analyses ◽  
Fraud Risk ◽  
Tone At The Top

ABSTRACT: This study examines how external auditors' accessibility to “tone at the top” knowledge impacts subsequent audit judgments. To examine this relationship, a decision aid is investigated that differentially facilitates the auditors' retrieval of “tone at the top” evidence from memory. Results of an experiment indicate that, holding the client's “tone at the top” constant, the structure of a control environment decision aid influences the auditors' mental representation of the “tone at the top.” Further, favorable “tone at the top” mental representations transfer to induce relatively favorable control environment and fraud risk assessments, and greater reliance on management's explanation for variances detected in analytical procedures. Mediation analyses identify the control environment assessment as a mediator between the influenced mental representation and the subsequent fraud risk and analytical procedure judgments. The results of the paper underscore the importance of how auditors develop their “tone at the top” mental representations, the influence of these mental representations on subsequent audit judgments, and the stage in the audit process where interventions can improve audit quality. Data Availability: Contact the author.

Modelling future glacier evolution: Which feedbacks are relevant?

2020 ◽  
Author(s):  
Matthias Huss ◽  
Enrico Mattea ◽  
Andreas Linsbauer ◽  
Martin Hoelzle
Keyword(s):  
Energy Balance ◽  
Data Availability ◽  
Swiss Alps ◽  
Balance Model ◽  
Ice Dynamics ◽  
Feedback Effects ◽  
Proglacial Lakes ◽  
Regional Climate Model Output ◽  
The Future ◽  
Energy Balance Approach

<div> <div>Numerous models to project the future evolution of mountain glaciers in response to ongoing climate change are available, both at the local and the global scale. However, a suite of partly major simplifications is necessary in these models given the restrictions in data availability. Whereas most models account for the primary feedbacks, such as the snow-ice albedo feedback and the dynamic glacier response in some way, a considerable number of yet poorly understood or less investigated feedbacks is present that might significantly hamper the reliability of current glaciological projections.</div> <div> </div> <div>Here, we present results of a detailed modelling study for the example of Vadret da Morteratsch, Swiss Alps. A surface mass balance model accounting for ice dynamics is forced with downscaled regional climate model output (68 scenarios, CH2018) for the period 2015 to 2100. Various processes are either parameterized or explicitly accounted for. We focus on the use of a fully distributed surface energy-balance approach in comparison to simplified degree-day methods. The relevance of projected changes in different components of the energy balance is assessed using model experiments. In particular, the importance of feedback effects due to (1) the spatio-temporal evolution of supraglacial debris, (2) the formation of new proglacial lakes, and (3) changes in bare-ice albedo and local direct solar irradiance is investigated.</div> <div> </div> <div>We find that the above feedback effects all have a rather small potential to substantially impact on the rates of expected glacier retreat. In some cases, this is unexpected (e.g. for debris coverage and proglacial lakes) but can be explained by compensating processes. We also discuss and visualize the future wastage of Vadret da Morteratsch under the newest generation of climate scenarios, and put these results into context with previous studies, as well as with plans to artificially reduce the rate of glacier mass loss.</div> </div>

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.

scholarly journals Review of Snow Data Assimilation Methods for Hydrological, Land Surface, Meteorological and Climate Models: Results from a COST HarmoSnow Survey

Geosciences ◽  
2018 ◽  
Vol 8 (12) ◽  
pp. 489 ◽  
Author(s):  
Jürgen Helmert ◽  
Aynur Şensoy Şorman ◽  
Rodolfo Alvarado Montero ◽  
Carlo De Michele ◽  
Patricia de Rosnay ◽  
...  
Keyword(s):  
Data Assimilation ◽  
Numerical Weather Prediction ◽  
Land Surface ◽  
Climate Models ◽  
Weather Prediction ◽  
Data Availability ◽  
Observation Data ◽  
Climate Change Scenarios ◽  
Numerical Weather ◽  
The Future

The European Cooperation in Science and Technology (COST) Action ES1404 “HarmoSnow”, entitled, “A European network for a harmonized monitoring of snow for the benefit of climate change scenarios, hydrology and numerical weather prediction” (2014-2018) aims to coordinate efforts in Europe to harmonize approaches to validation, and methodologies of snow measurement practices, instrumentation, algorithms and data assimilation (DA) techniques. One of the key objectives of the action was “Advance the application of snow DA in numerical weather prediction (NWP) and hydrological models and show its benefit for weather and hydrological forecasting as well as other applications.” This paper reviews approaches used for assimilation of snow measurements such as remotely sensed and in situ observations into hydrological, land surface, meteorological and climate models based on a COST HarmoSnow survey exploring the common practices on the use of snow observation data in different modeling environments. The aim is to assess the current situation and understand the diversity of usage of snow observations in DA, forcing, monitoring, validation, or verification within NWP, hydrology, snow and climate models. Based on the responses from the community to the questionnaire and on literature review the status and requirements for the future evolution of conventional snow observations from national networks and satellite products, for data assimilation and model validation are derived and suggestions are formulated towards standardized and improved usage of snow observation data in snow DA. Results of the conducted survey showed that there is a fit between the snow macro-physical variables required for snow DA and those provided by the measurement networks, instruments, and techniques. Data availability and resources to integrate the data in the model environment are identified as the current barriers and limitations for the use of new or upcoming snow data sources. Broadening resources to integrate enhanced snow data would promote the future plans to make use of them in all model environments.

SOX 404(b) Audits: Evidence from Auditing the Financial Close Process of the Accounting System

2019 ◽  
Vol 34 (3) ◽  
pp. 77-103
Author(s):  
Diane J. Janvrin ◽  
Maureen Francis Mascha ◽  
Melvin A. Lamboy-Ruiz
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Internal Controls ◽  
Data Availability ◽  
Financial Statement ◽  
Accounting System ◽  
Audit Process ◽  
Financial Statement Audit ◽  
Multiple Method ◽  
Access Controls

ABSTRACT Auditing Standard No. 5 requires that auditors integrate their evaluation of large issuers' internal control over financial reporting (ICFR) into their financial statement audit process, but the PCAOB warns that auditors may not adequately test related manual and systems internal controls. We use a multiple method approach to examine how auditors evaluate one important component of ICFR, the financial close process, and whether they evaluate it differently when conducting a SOX 404(b) integrated versus a financial statement audit. Interviewees relied heavily on walkthroughs, and tended to perform only cursory reviews of entity-level controls related to the financial close process. In addition, they often failed to test the link between the general ledger and supporting systems, including evaluating related access controls. Financial statement-only auditors were more likely to re-perform key controls than rely on cursory walkthroughs. Auditors performing integrated audits appeared to over-rely on ICFR findings when conducting financial statement audits. Data Availability: Interview data are available from the first author. PCAOB inspection reports are publicly available.

Customer-Base Concentration: Implications for Audit Pricing and Quality

2018 ◽  
Vol 31 (1) ◽  
pp. 129-152 ◽  
Author(s):  
Gopal V. Krishnan ◽  
Panos N. Patatoukas ◽  
Annika Yu Wang
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Customer Relationships ◽  
Data Availability ◽  
Audit Process ◽  
Audit Pricing ◽  
External Auditors ◽  
Customer Base ◽  
Conventional View ◽  
Audit Fee

ABSTRACT What are the implications of major customer dependency, i.e., the degree of a supplier firm's dependency on its major customers, for external auditors? While the conventional view emphasizes the negatives of major customer dependency for client business risk, we find that suppliers with more concentrated customer bases spend less on audit fees. The evidence is consistent with reduced audit effort due to efficiency gains in the audit process, especially when suppliers with more concentrated customer bases share the same auditors with their long-standing major customers. The audit fee discount we identify does not imply that audit quality declines with customer-base concentration. In fact, we find that suppliers with more concentrated customer bases are less likely to experience material restatements of previously audited financial statements. Taking the external auditors' perspective, our study provides new managerial insights on the costs and benefits of major customer relationships for supplier firms. Data Availability: All data are available from sources identified in the text.

The Timeliness of Bad Earnings News and Litigation Risk

2012 ◽  
Vol 87 (6) ◽  
pp. 1967-1991 ◽  
Author(s):  
Dain C. Donelson ◽  
John M. McInnis ◽  
Richard D. Mergenthaler ◽  
Yong Yu
Keyword(s):  
Lower Incidence ◽  
Data Availability ◽  
Earnings Forecast ◽  
Litigation Risk ◽  
Prior Work ◽  
Press Releases ◽  
Analyst Earnings ◽  
Jel Classifications

ABSTRACT This study investigates whether the timely revelation of bad earnings news is associated with a lower incidence of litigation. The timeliness of earnings news is captured by a new measure based on the evolution of the consensus analyst earnings forecast. Holding total bad earnings news and other determinants of litigation constant, we find that earlier revelation of bad earnings news lowers the likelihood of litigation. This result holds for both settled and dismissed lawsuits. Further, we reconcile our findings with prior work that measures timeliness using managerial warnings via press releases. These tests suggest our findings are attributable to the ability of our timeliness measure to capture bad earning news revealed through disclosure channels beyond press releases. Data Availability: Data are available from public sources identified in the paper. JEL Classifications: K22; K41; M41.

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