Accounting Comparability, Audit Effort, and Audit Outcomes

Abstract

Accounting comparability among peer firms in the same industry reflects the similarity and the relatedness of firms’ operating environments and financial reporting. From the perspectives of “inherent audit risk” and “external information efficiency,” comparability is helpful for auditors in assessing client audit risk and lowers the costs of information acquisition, processing, and testing. I posit that the availability of information about comparable clients helps improve audit efficiency and accuracy. Empirical results show that comparability is negatively related to audit effort (surrogated by audit fees and audit delay). Moreover, comparability is negatively associated with the likelihood of audit opinion errors. These findings are robust to different specifications of regression models, particularly for the “endogeneity” issues due to the possible reverse causality that auditor style might influence client firms’ comparability. In sum, the study shows that accounting comparability enhances the utility of accounting information for external audits.

Corporate social responsibility and financial statement comparability: Evidence from China

“…Comparability is a basic property of financial statement that enables users to identify similarities in and differences between two sets of economic phenomena (Financial Accounting Standards Board [FASB], ; International Accounting Standards Board, ). Meanwhile, comparability is conducive to lowering information acquisition and processing costs and enhancing the quality of information available to financial statement users (Barth, Landsman, Lang, & Williams, ; De Franco, Kothari, & Verdi, ; Zhang, ). In contrast to previous studies on the association between CSR and reporting quality measures that primarily determine the nature of relevance and faithful representation in financial statements, comparability requires at least two items from at least two different entities or two accounting periods, thereby distinguishing this property from other characteristics (e.g., relevance and faithful representation) that focus on financial items in a single entity or period (De Franco et al, ; Endrawes, Feng, Lu, & Shan, ).…”

“…From the perspective of agency theory, managers may engage in CSR to advance their own personal agendas or cover up the impact of opportunistic behaviours or corporate misconduct (Jensen, ; Hemingway & Maclagan, ; Petrovits, ; Surroca & Tribó, ; Ben‐Amar & Belgacem, ). Such an engagement results in a relatively distinct operating environment and financial reporting behaviours, which are in contrast to the similarity property of financial statement comparability (Zhang, ). Therefore, we expect a negative association between positive CSR performance and financial statement comparability.…”

Three Essays on Financial Statement Comparability

“…of the comparability score is -0.56 (-0.30), which is consistent with recent studies (e.g., Imholf et al 2017;Chen et al 2017;Zhang et al 2018). The means and median of all control variables are consistent with those presented by Cairney and Young (2006).…”

“…The other stream of research has examined the impact of accounting comparability on financial and economic phenomena. 9 Because comparable firms become better benchmarks for each other, 9 The existing literature, for example, documents a significant relation between financial statement comparability and: analyst following ; audit fees (Zhang 2018); accounting after the adoption of IFRS (Brochet, Jagolinzer, and Riedl 2013); credit risk (Kim et al 2013); valuation of seasoned information transfer among them becomes easy and users have access to more information about firms' financial performance with less effort (Kim et al 2013).…”

“…Is the different between bid-ask price. -0.02 -0.02 0.15 0.00 0.01 -0.01 -0.01 0.05 0.00 0.01 1.00 Litigation -0.01 -0.14 -0.13 0.12 0.00 0.00 0.08 -0.22 -0.14 -0.06 -0. , Zhang (2018) shows that auditors charge lower audit fees for auditing highly comparable firms. Using partial correlation (homogeneity) of client operating expense, Cariney and Stewart (2015) find that audit fees are negatively associated with homogeneity.…”