Does Company Reputation Matter for Financial Reporting Quality? Evidence from Restatements*

Cao, Ying; Myers, Linda A.; Omer, Thomas C.

doi:10.1111/j.1911-3846.2011.01137.x

Cited by 262 publications

(142 citation statements)

References 134 publications

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“…Further, 3.1 percent of all observations report the remediation of the prior year's internal control weaknesses ( Remed ), while 1.2 percent report at least one material weakness in both years ( NonRemed ) and 2.5 percent report effective internal controls in the prior year, but a new material weakness in the current year ( NewProb ). Approximately 9.8 percent of our sample subsequently restate year t 's annual financial statements ( Annual_Restated ), which is similar to prior research (Cao et al ).…”

Section: Resultssupporting

confidence: 81%

The Loss of Information Associated with Binary Audit Reports: Evidence from Auditors' Internal Control and Going Concern Opinions

Christensen

Neuman

Rice³

2019

Contemporary Accting Res

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This study provides evidence that binary signals in audit reports are unable to fully communicate underlying risks that are inherently continuous in nature. Specifically, we find that companies whose audit reports signal an improvement in internal control effectiveness relative to the prior year are still more likely to subsequently restate the current year's financial statements than companies with no material weaknesses in either year. Similarly, companies deemed to no longer have substantial doubt of continuing as a going concern are still more likely to declare bankruptcy than companies with no going concern opinion in either year. Results in both settings suggest the presence of residual risk that cannot be communicated through a binary audit report, despite the fact that auditors recognize the risk, as evidenced by higher audit fees and longer audit report lags. Our findings are strongest when the reported improvement is more pronounced, and our results hold in matched samples. Our study provides empirical evidence that supports recent regulatory efforts to improve the content of the audit report and offers suggestions for future research.

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Section: Resultssupporting

confidence: 81%

The Loss of Information Associated with Binary Audit Reports: Evidence from Auditors' Internal Control and Going Concern Opinions

Christensen

Neuman

Rice³

2019

Contemporary Accting Res

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“…Prior research uses misstatements to proxy for poor financial reporting quality (Kinney et al 2004; Archambeault et al ; Carcello et al ; Cao et al ). We investigate the relation between audit committee co‐option and misstatements using the following model:

\begin{matrix} left \\ P R (M I S S T A T E M E N T_{i t}) = α_{0} + α_{1} C O ‐ O P T I O N_{i t} + α_{2} C O N T R O L S_{i t} + α_{j} Y e a r F E \\ + α_{k} I n d u s t r y F E, \end{matrix}

where:…”

Section: Methodsmentioning

confidence: 99%

The Monitoring Effectiveness of Co‐opted Audit Committees

Cassell

Myers

Schmardebeck

et al. 2018

Contemporary Accting Res

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We investigate the relation between audit committee co‐option and financial reporting quality, where audit committee co‐option is measured as the proportion of audit committee members who joined the board after the appointment of the current Chief Executive Officer (CEO). Because CEOs are often actively involved in the director nomination and selection process, we expect that higher levels of audit committee co‐option will be associated with less effective monitoring, as evidenced by more financial statement misstatements and greater absolute discretionary accruals. Consistent with our expectations, we find a positive relation between audit committee co‐option and misstatements as well as between audit committee co‐option and absolute discretionary accruals. Our findings should be of interest to regulators, investors, and other stakeholders because we provide new evidence about how potential CEO influence on director nominations and audit committee appointments impacts the effectiveness of monitoring by the audit committee.

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“…Prior studies have found a positive association between board quality and audit fee, which is interpreted to mean that higher quality boards demand higher quality audits (Abbott, Parker, Peters, & Raghunandan, ; Carcello, Hermanson, Neal, & Riley, ). However, an alternative explanation is that, when board quality is perceived to be low, auditors demand a premium to compensate for the additional audit hours and for the use of audit personnel with greater experience and expertise for such audits (Cao, Myers, & Omer, ). We argue that this alternative view is applicable to the presence of “problem” directors on the board, and test whether auditors perceive boards with “problem” directors to be of lower quality and, therefore, charge higher audit fees.…”

Section: Introductionmentioning

confidence: 99%

“Problem” directors and audit fees

2019

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This study investigates the association between audit fees and the presence of “problem” directors on corporate boards and audit committees. “Problem” directors, in this context, are those directors who have been involved in corporate financial failures and integrity indiscretions in the past. Auditors regard the presence of such directors on boards and audit committees as audit risk, and may have to enhance their audit procedures, leading to higher audit fees. Using a sample of 9,175 firm‐year observations from 2004 to 2010 of US firms, we find that the presence of “problem” directors on boards and audit committees is associated with higher audit fees. This finding has a policy implication for corporate managers, that they should be mindful of the increase in perceived audit risk that arises from professional and personal attributes of directors when recruiting individuals to serve on their boards.

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Does Company Reputation Matter for Financial Reporting Quality? Evidence from Restatements*

Cited by 262 publications

References 134 publications

The Loss of Information Associated with Binary Audit Reports: Evidence from Auditors' Internal Control and Going Concern Opinions

The Loss of Information Associated with Binary Audit Reports: Evidence from Auditors' Internal Control and Going Concern Opinions

The Monitoring Effectiveness of Co‐opted Audit Committees

“Problem” directors and audit fees

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