Audit Implications of Non‐GAAP Reporting

Hallman, Nicholas; Schmidt, Jaime J.; Thompson, A. H.

doi:10.1111/1475-679x.12433

Cited by 18 publications

(37 citation statements)

References 30 publications

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“…Audit Materiality and Audit Effort: Evidence From Materiality Benchmarks Accounting, Finance & Governance Review Second, we provide evidence from materiality benchmarks, which extends prior studies: Choudhary et al (2019), Hallman et al (2022) and Quick et al (2022). We examine how underlying benchmark choices influence audit effort in two ways.…”

Section: Introductionsupporting

confidence: 59%

“…We show that audit effort is positively associated with non-GAAP benchmarks, indicating that auditors spend more time on their audits when there are unusual events. These new insights are important because they reveal how auditors' use of non-GAAP benchmarks may not adversely affect the amount of work auditors perform, which prior studies suggest (Brody et al, 2003;Hallman et al, 2022).…”

Section: Introductionmentioning

confidence: 94%

“…Auditor benchmark choices (in particular, non-GAAP benchmarks) are important as they may directly impact audit quality. If non-GAAP benchmarks result in higher materiality thresholds, they could reduce the scope of audit procedures and audit evidence gathered (Hallman et al, 2022). Martinov & Roebuck (1998) call for researchers to analyse audit materiality thresholds more directly.…”

Section: Introductionmentioning

confidence: 99%

“…alternative performance measures) have become increasingly prevalent in financial reporting (Anderson et al, 2021;Black et al, 2018Black et al, , 2021Campbell et al, 2022;Chen et al, 2021). However, there is limited research on auditors' non-GAAP benchmarks (Brody et al, 2003;FRC, 2015FRC, , 2016a, Hallman et al (2022) being an exception. We extend the non-GAAP literature in auditing by examining whether auditors' use of non-GAAP benchmarks is associated with audit effort.…”

Section: Introductionmentioning

confidence: 99%

“…These new insights are important because they reveal how underlying benchmark choices influence how auditors plan their audits. Hallman et al (2022) examine auditors' use of non-GAAP benchmarks and managers' use of non-GAAP metrics, but they do not examine whether auditors' use of non-GAAP benchmarks affects total audit effort. We extend Hallman et al's (2022) study of non-GAAP materiality benchmarks by examining the association between audit effort and non-GAAP benchmarks.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Audit Materiality and Audit Effort: Evidence From Materiality Benchmarks

Dwyer

Brennan

Kirwan³

2022

Accounting, Finance &Amp; Governance Review

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The Financial Reporting Council is the first auditing standard-setting body to require audit materiality threshold disclosure. Audit materiality thresholds are a function of auditor benchmark choices and percentage rates chosen for the benchmarks. This study investigates the association between audit effort and audit materiality thresholds, auditor benchmark choices and auditors’ use of benchmarks computed based on non-Generally Accepted Accounting Principles (non-GAAP) measures. The study uses expanded audit reports of 328 FTSE-350 companies with 2015 year-ends. The research finds a negative association between audit effort (proxied by audit fees) and audit materiality thresholds. The analysis provides new evidence on the association between audit effort and auditor benchmark choices. First, it reveals that audit effort is negatively associated with asset rather than other (profit/adjusted profit/revenue) benchmark choices. Second, it finds that audit effort is positively associated with non-GAAP benchmarks, indicating that auditors spend more time on their audits when there are unusual events.

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Section: Introductionsupporting

confidence: 59%

Section: Introductionmentioning

confidence: 94%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Audit Materiality and Audit Effort: Evidence From Materiality Benchmarks

Dwyer

Brennan

Kirwan³

2022

Accounting, Finance &Amp; Governance Review

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Auditors’ perceptions of alternative performance measures – alternative truths and professional skepticism

Rautiainen

Saastamoinen

Pajunen

2023

Accounting in Europe

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Auditor tenure and non-GAAP earnings

Kim,

Son

2024

MAJ

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Purpose This study aims to examine whether the newly available auditor tenure information is associated with non-GAAP earnings, as the recent requirement to disclose the initial year of auditor-client relationship in audit reports may give the impression that longer auditor tenure may be related to lower audit quality. Design/methodology/approach Using a sample of firm-quarters from 2017 to 2020, the authors conduct both univariate and regression analyses. We use hand-collected data for auditor tenure, SEC comment letters, and non-GAAP variables. Findings First, the authors find that the likelihood of disclosing non-GAAP earnings monotonically increases with auditor tenure on a univariate basis. Second, auditor tenure is negatively associated with aggressive non-GAAP reporting. Third, the authors document evidence of aggressive reporting in general; that is, items excluded in calculating non-GAAP earnings are associated with future performance. However, the association declines with longer auditor tenure. Finally, the authors report evidence that the likelihood of receiving an SEC comment letter that contains non-GAAP comments decreases with longer auditor tenure. Practical implications The results show that regulators need to consider both GAAP and non-GAAP disclosures’ costs and benefits when enacting auditor tenure regulation. Investors can benefit from the findings in evaluating the quality of non-GAAP earnings. The findings are also relevant to the SEC when allocating limited resources in monitoring non-GAAP reporting. Originality/value To the best of the authors’ knowledge, this is the first study showing that auditor tenure is associated with the quality of non-GAAP earnings. Given that financial reporting quality should be understood as a comprehensive system comprising both mandatory and voluntary disclosures, this study complements the literature that examines the effect of auditor tenure on financial reporting quality using GAAP reporting.

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Audit Implications of Non‐GAAP Reporting

Cited by 18 publications

References 30 publications

Audit Materiality and Audit Effort: Evidence From Materiality Benchmarks

Audit Materiality and Audit Effort: Evidence From Materiality Benchmarks

Auditors’ perceptions of alternative performance measures – alternative truths and professional skepticism

Auditor tenure and non-GAAP earnings

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