In this paper, we examine firms' use of the Internet to enhance the relevance of their financial reporting. We define a firm as practicing Internet Financial Reporting (IFR) when it provides in its web site either (1) a comprehensive set of financial statements (including footnotes and the auditors' report), (2) a link to its annual report elsewhere on the Internet or (3) a link to the U.S. Security and Exchange Commission's (SEC) Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. While 70 percent of the firms in our sample engage in IFR, we find substantial variation in the quality of firms' IFR practices. Specifically, the variations in quality pertain to the timeliness and therefore, the usefulness of firms' financial reporting on the Internet. We find that some firms provide more timely financial disclosures via the Internet (e.g., monthly sales) while other firms report outdated financial data (e.g., two-year old annual reports). We also observe that the usefulness of firms' financial reporting on the Internet depends on how easy it is to access that data, the amount of data disclosed and/or whether users can download or analyze the data. To substantiate firms' incentives for engaging in IFR, we sent surveys to firms with web sites in our sample and asked them to report their perceived costs and benefits related to establishing an Internet presence. Firms responded to our questions about why they established an Internet presence by indicating that they perceive their web sites to be an important vehicle to disseminate information to shareholders. After documenting how and why firms use the Internet to voluntarily disclose financial information, we develop the implications of such practices for consumers who demand financial information, firms that supply financial data, auditors and market regulators.

This paper investigates auditors' assessments of earnings manipulation risk and corporate governance risk, and their planning and pricing decisions in the presence of these identified risks. To conduct this investigation, we use engagement partners' assessments of their existing clients made during the participating public accounting firm's client continuance risk assessment process. We find that auditors plan increased effort and billing rates for clients with earnings manipulation risk, and that the positive relationships between earnings manipulation risk and both effort and billing rates are greater for clients that also have heightened corporate governance risk. These findings provide evidence that auditors assess situations involving both an aggressive management and inadequate corporate governance, and that there is a relationship between those assessments and auditors' planning and pricing decisions.

Little is known about how audit partners make the client-acceptance decision. In this paper, a model is developed and tested that characterizes the client-acceptance decision as a process of risk evaluation and risk adaptation. The model proposes that auditors will evaluate client-related risks (e.g., financial viability, and internal control) and use that evaluation to determine if the audit firm will suffer a loss on the engagement via a lack of engagement profitability or future litigation. The model proposes that auditors will adapt to the client-acceptance risks by using three strategies: (1) screening clients based on their risk characteristics; (2) screening clients based on the audit firm's risk of loss on the engagement; and (3) more proactively adapting using strategies including adjusting the audit fee, making plans about necessary audit evidence, making plans about personnel assignment, and/or adjusting the amount of data collected during the client-acceptance process. To test the model, an experiment was conducted using 137 highly experienced audit partners as participants. The results show that the partners considered the relationships between client-related risks and used their evaluation of those risks to evaluate the audit firm's risk of loss on the engagement. In terms of risk adaptation, partners screened clients based on the clients' risk characteristics and based on the audit firm's risk of loss on the engagement. Contrary to prediction, the partners did not use more proactive risk-adaptation strategies (e.g., adjusting the audit fee, making plans about necessary audit evidence, etc.) to make less “acceptable” clients more acceptable. It appears that avoiding risk, rather than proactively adapting to risk, is descriptive of how audit partners currently make the client-acceptance decision.

This paper examines whether risk-management strategies (specifically, the use of specialist personnel and higher billing rates) moderate the effect of risk on client acceptance decisions, thereby assisting auditors in bringing prospective client relationships to acceptable risk/return levels. We propose a conceptual model of the client acceptance decision process, and use archival data on one firm's actual client acceptance decisions to test the model. Our results demonstrate the selective use of risk-management strategies in the client acceptance decision, based on the nature of the risks present for each particular client. Specifically, plans to charge a higher billing rate are associated with a reduction in the negative relationship between client acceptance likelihood and both going-concern risk and public trading status, and plans to assign specialist personnel are associated with a reduction in the negative relationship between client acceptance likelihood and both fraud risk and error risk. Therefore, we provide evidence that while risky clients are less likely to be accepted overall, the application of particular risk-management strategies to particular risks increases the likelihood of accepting such clients.

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