Effects of Increasing Enforcement on Financial Reporting Quality and Audit Quality

Ewert, Ralf; Wagenhofer, Alfred

doi:10.1111/1475-679x.12251

Cited by 71 publications

(35 citation statements)

References 46 publications

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“…The second measure is restricted to extreme forms of auditor conservatism and misses the more subtle downward bias which might be incorporated into the published financial statements on the part of the auditor as captured by our model. Overall, the insights provided by our analysis have the following main empirical implications: Our findings underline the importance to carefully disentangle the sphere of the preparer and the auditor when examining the effects of enforcement activities (see also Ewert and Wagenhofer 2019). Focusing on the enforcement of judgmental accounting decisions, we outline the ambiguous implications of increasing auditor conservatism for audit and financial reporting quality.…”

Section: Introductionmentioning

confidence: 66%

“…As enforcement actions not only reveal misconduct by the reporting entity, but simultaneously indicate a poor audit quality (Fearnley et al 2002), they are assumed to unfold a disciplinary effect on the behavior of both, the preparer and the auditor in charge (Berger 2010;Ewert and Wagenhofer 2019). While the preparer should typically be prevented from earnings manipulation (Dechow, Sloan, et al 1996;Ernstberger et al 2012;Böcking et al 2015), the auditor is expected to increase her audit effort and thus audit quality (Fearnley et al 2002;Meusburger and Pelger 2020).…”

Section: Introductionmentioning

confidence: 99%

“…As the effect of enforcement on the preparer's behavior has already been extensively investigated in this literature, we focus on the interrelation of enforcement and auditing. Our study is most closely related to Ewert and Wagenhofer (2019) who examine financial reporting quality as the outcome of interrelated decisions of a firm owner, a preparer, an auditor and enforcement using an agency model. They find that enforcement and auditing have a complementary relation when enforcement is relatively weak, but are substitutes when enforcement becomes relatively strong.…”

Section: Introductionmentioning

confidence: 99%

“…In contrast to our model, overall financial reporting quality (understood as the prevention of intentional errors only) is strictly increasing in enforcement as stricter enforcement simultaneously prevents earnings management. By introducing the element of auditor conservatism, we extend Ewert and Wagenhofer (2019) who implicitly assume that the auditor adopts a liberal strategy, i.e., that she confirms the accounting report proposed by the preparer whenever she is not able to verify it.…”

Section: Introductionmentioning

confidence: 99%

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The Effect of Enforcement on Auditor Conservatism.

Peters-Olbrich¹

2020

Preprint

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This paper provides a theoretical perspective on the effect of enforcement on auditor behavior and overall financial reporting quality. Thereby, we consider auditor conservatism as a strategy towards uncertainty which might arise in highly discretionary accounting areas during the audit procedure. Given a manipulating manager, we show that stricter enforcement increases both, examination as well as conservative audit effort. While examination effort enhances the correctness of the audited accounting signals, auditor conservatism introduces a downward bias into the published reports as the auditor requires downward adjustments of the items she was not able to verify during the first audit stage. Although a tightening of enforcement strictness prevents overstated reports, financial reporting quality is therefore not necessarily increased. Stricter enforcement enhances conformity of published reports with applicable accounting standards in environments of high manipulation risk. In environments of low manipulation risk, however, it depends on the relation of examination and conservative effort whether increased enforcement strictness improves the overall financial reporting quality.

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Section: Introductionmentioning

confidence: 66%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

The Effect of Enforcement on Auditor Conservatism.

Peters-Olbrich¹

2020

Preprint

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“…Financial reporting quality does not always improve with greater enforcement strength. It mainly depends on the proxy for financial reporting quality [9].…”

Section: Financial Management and Innovation Possibilitiesmentioning

confidence: 99%

Target Orientation of Financial Management in Manufacturing Enterprises

Kajanová¹

2019

Proceedings of the International Conference on Economics, Management and Technology in Enterprises 2019 (EMT 2019)

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Innovation in financial management is an up-todate and key option for increasing the performance of manufacturing businesses and achieving their intended goals. Entrepreneurial subjects are taking advantage of the period of recession and the slowdown in the changes, the impact of the economic crisis on the release of pressures and the negative trends in the development of the business environment. They are open to new challenges and opportunities to strengthen and improve their performance, achieve better economic performance and focus on sustainable development that will support the long-term and lasting nature of its existence. The main objective of this contribution is to analyze the possibilities of using new methods and approaches in the financial management of production enterprises, to identify the benefits and threats of the target orientation in financial management, to propose an appropriate system of transfer of acquired knowledge into the business sphere. The main benefit of this contribution is the presentation of an innovative approach to financial management, which is the target orientation, the results of the survey on the possibilities for implementation in small and medium sized enterprises, the formulation of the positives and the negatives of target orientation of the financial management, and the proposal to transfer knowledge from this area to the financial management of the manufacturing enterprises.

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Do outsiders listen to insiders? The role of government support in market reactions to earnings announcements

2020

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We investigate whether government support influences investors' perceptions of firms' financial disclosure. We find that earnings announcements from firms receiving more subsidies are perceived as more reliable by outsiders, eliciting stronger market reactions. Further analysis indicates that this positive effect is more pronounced when firms have poorer corporate governance and greater information asymmetry. Supplementary analysis shows that government support enhances investors' reactions through three possible channels: improving firms' earnings quality, investment efficiency, and market competitiveness. There are implications for the informativeness of firms' financial disclosures and the mechanism that government support on investors' attitude towards the released information.

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Effects of Increasing Enforcement on Financial Reporting Quality and Audit Quality

Cited by 71 publications

References 46 publications

The Effect of Enforcement on Auditor Conservatism.

The Effect of Enforcement on Auditor Conservatism.

Target Orientation of Financial Management in Manufacturing Enterprises

Do outsiders listen to insiders? The role of government support in market reactions to earnings announcements

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