Audit quality and properties of analysts’ information environment

He, Wen; Sidhu, Baljit K.; Taylor, Stephen L.

doi:10.1111/jbfa.12358

Cited by 20 publications

(14 citation statements)

References 83 publications

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“…Large firms may attract greater media scrutiny due to their economic significance in the marketplace. Relatedly, larger firms may display higher reporting quality because of their appointment of reputable auditors to verify their accounting records, which may improve the informativeness of reported earnings (Behn et al, 2008; He et al, 2019). This effect has also been shown to extend to voluntary disclosures (Dunn & Mayhew, 2004).…”

Section: Resultsmentioning

confidence: 99%

How important are semi‐annual earnings announcements? An information event perspective

Taylor

Tong

2023

Accounting & Finance

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Using a method that avoids the need to specify earnings expectations, we demonstrate that the period surrounding the semi‐annual announcement of Australian firms' earnings is, on average, an important source of information. Although there is substantial year‐to‐year variation, we observe no evidence of any significant time trend, and also conclude that a shift from Australian domestic generally accepted accounting principle to International Financial Reporting Standards did not impact the association between earnings announcement windows and stock returns. We also find no evidence that the informativeness of earnings announcements varies systematically with firm size, analyst following or economic news (i.e., positive vs. negative stock returns, profits vs. losses), although we do observe significant variation across industries. Our conclusion is further supported by contrasting the earnings release date with the days immediately prior to release, or high information days other than earnings announcement windows. Using a more precise event window relative to prior studies (i.e., 3 h vs. 3 days), we confirm that earnings announcements contain significant new information about fundamentals.

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Section: Resultsmentioning

confidence: 99%

How important are semi‐annual earnings announcements? An information event perspective

Taylor

Tong

2023

Accounting & Finance

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“…The quality of auditing affects the well-being of investors whose decisions rely on audited financial statements. Prior research has attempted to extend our understanding of audit quality by linking it to financial reporting quality (Balsam et al , 2003; Krishnan, 2003), cost of equity (Khurana and Raman, 2004), cost of debt (Pittman and Fortin, 2004), the firm’s information environment (Dunn and Mayhew, 2004; He et al , 2019) and other important aspects of a firm’s performance. In this study, we test whether management’s expressed attention to audit matters in the MD&A, as a component of the firm’s “tone at the top” (PCAOB) is related to audit quality.…”

Section: Conclusion and Discussionmentioning

confidence: 99%

“Tone at the top”: management’s discussion and analysis and audit quality

Tam

Xu²,

Fernando³

et al. 2023

MAJ

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Purpose This paper aims to investigate whether the managers’ emphasis on audit in the management’s discussion and analysis (MD&A) section of the 10-K filing, as part of the firm’s “tone at the top,” is linked to audit quality. Design/methodology/approach Adopting a computational linguistics approach, the authors measure the manager’s audit emphasis as the frequency of audit-related words in the MD&A. The authors then assess the relationship between audit emphasis and audit quality with ordinary least squares and probit regression models. Findings This study finds that the manager’s audit emphasis, proxied by the count of audit-related words, is positively associated with audit fees, audit delay, the appointment and retention of Big 4 and industry-specialist auditors, and the probability of switching to Big 4 auditors, while negatively linked to abnormal accruals and the possibility of financial misstatements. Research limitations/implications The audit emphasis measure suffers from limitations. The computer program determining audit emphasis may misinterpret words in the MD&A. Researchers need to consider procedures to minimize misinterpretations. Practical implications Frequency of audit words in the MD&A reflects the firm’s aspiration for audit quality. Auditors, regulators and investors could ascertain such aspiration from past and current MD&As. Originality/value This study associates the manager’s emphasis on audit, measured with computational linguistics from the MD&A, with realized audit quality.

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“…Additionally, we control for audit quality and litigation risk. We proxy for audit quality using an indicator variable BIG4 (see DeFond & Zhang, 2014, for an overview; B. E. Christensen et al., 2016; He et al., 2019). We also include other determinants of audit quality: an auditor industry specialization ( SPECIALIST ) and audit fees ( AUDITFEES) (Ferguson et al., 2003; Reichelt & Wang, 2010).…”

Section: Methodology and Sample Selectionmentioning

confidence: 99%

Changes in accounting estimates: An update of priors or an earnings management strategy of “last resort”?

Beaulieu

Hayes

Timoshenko

2022

Business Fin & Account

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Evidence from prior research is mixed about whether accounting estimate changes are strategically motivated, on average, or whether they reflect new or updated information. To interpret this difference, we investigate, by category of material changes in accounting estimates, the association between estimate changes and subsequent restatements.We also explore the determinants of both income-increasing and income-decreasing estimate changes for different categories of estimate changes. We find that the motivations for and the determinants of estimate changes depend on the type of change and on whether the changes in estimates are income-increasing or income-decreasing. Overall, we conclude that when companies are motivated to bias earnings and they cannot do so by manipulating other within generally accepted accounting principles (GAAP) accruals, they sometimes resort to using estimate changes. Our more detailed investigation of estimate changes at the account level suggests a more nuanced view of the determinants of changes in accounting estimates. We develop a more complete model of the determinants of changes in accounting estimates than those used in this emerging literature, which should be of interest to accounting academics, regulators, audit practitioners and audit committee members.

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Audit quality and properties of analysts’ information environment

Cited by 20 publications

References 83 publications

How important are semi‐annual earnings announcements? An information event perspective

How important are semi‐annual earnings announcements? An information event perspective

“Tone at the top”: management’s discussion and analysis and audit quality

Changes in accounting estimates: An update of priors or an earnings management strategy of “last resort”?

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