The Effect of the External Accountant's Review on the Timing of Adjustments to Quarterly Earnings

Ettredge, Michael; Simon, Dan T.; Smith, David B.; Stone, Mary S.

doi:10.2139/ssrn.163808

Cited by 22 publications

(46 citation statements)

References 6 publications

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“…When considering audit reporting lag, we find the average annual report lag ( ARLag ) is 68.64 days, which is almost 13 days longer than the interim reporting lag ( INTLag ) of 56.10 days. This timing difference is consistent with less effort being expended upon the interim review compared with the annual audit (Chen et al, ; Ettredge et al, , ). Univariate comparisons for the square root of ARLag ( SqrtARLag ) and INTLag ( SqrtINTLag ) are insignificant for mean and median tests.…”

Section: Resultssupporting

confidence: 61%

Interim reviews and the association between partner rotations and audit fees

Grosse

Scott

2018

Int J Auditing

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This paper considers whether the association between partner rotation and audit fees varies based on whether the partner is rotated before the interim review or annual report audit. Consistent with prior literature, there is some evidence of higher fees in the year of rotation, but we find this effect is driven by partner rotations that occur before the interim review, which are 7.14% higher on average. We argue that rotations before the annual report audit are less likely to be planned, and thus audit firms cannot pass on increased costs due to a weaker bargaining position. Supporting evidence is provided, as results only persist when client bargaining power is low, and in contrast there are lower fees for rotations that occur before the annual report audit when client bargaining power is high.

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Section: Resultssupporting

confidence: 61%

Interim reviews and the association between partner rotations and audit fees

Grosse

Scott

2018

Int J Auditing

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“…A full audit provides reasonable assurance of a low risk of material misstatements and requires a comprehensive evaluation of whether the financial statements are prepared according to generally accepted accounting principles (GAAP) (APB, 1999;Ettredge et al, 2000;Manry et al, 2003). A full audit provides reasonable assurance of a low risk of material misstatements and requires a comprehensive evaluation of whether the financial statements are prepared according to generally accepted accounting principles (GAAP) (APB, 1999;Ettredge et al, 2000;Manry et al, 2003).…”

Section: Nature Of Auditor Involvement In Interim Reportsmentioning

confidence: 99%

“…A full audit provides reasonable assurance of a low risk of material misstatements and requires a comprehensive evaluation of whether the financial statements are prepared according to generally accepted accounting principles (GAAP) (APB, 1999;Ettredge et al, 2000;Manry et al, 2003). The major difference between a review and a full audit is that a review does not include tests of accounting records through inspection, observation, or confirmation and obtaining corroborative evidence in response to enquiries (Ettredge et al, 2000). The major difference between a review and a full audit is that a review does not include tests of accounting records through inspection, observation, or confirmation and obtaining corroborative evidence in response to enquiries (Ettredge et al, 2000).…”

Section: Nature Of Auditor Involvement In Interim Reportsmentioning

confidence: 99%

“…Whilst in the US setting the Securities Exchange Commission (SEC) requires companies to have their interim information reviewed by external auditors (Ettredge et al, 1994(Ettredge et al, , 2000Manry et al, 2003), in the UK companies have considerable discretion on whether or not to review the interim financial reports. The Cadbury Committee (1992) recommended that external auditors should review interim reports and discuss the results of such a review with the AC.…”

Section: Regulatory Requirements For Auditor Involvement In Interim Rmentioning

confidence: 99%

“…These include the credibility of information (ASB, 1997a;4 Bagshaw, 2000;Blackwell et al, 1998;Willenborg, 1999) and improving the quality of interim disclosures (Ettredge et al, 1994(Ettredge et al, , 2000. These include the credibility of information (ASB, 1997a;4 Bagshaw, 2000;Blackwell et al, 1998;Willenborg, 1999) and improving the quality of interim disclosures (Ettredge et al, 1994(Ettredge et al, , 2000.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Audit Committees and Voluntary External Auditor Involvement in UK Interim Reporting

Mangena

Tauringana

2008

Int J Auditing

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The study investigates the relationship between audit committee characteristics and the decision to engage external auditors to review published interim reports. The motivation for the study derives from the consensus notion that the audit committee enhances the quality of financial reporting. Using interim reports of 258 UK listed companies published in the period 2001–2002, the results of logistic regression analyses show that the likelihood of engaging an external auditor to review interim reports increases with audit committee independence and financial expertise and decreases with share ownership by audit committee members. The results show that audit committee size and the number of audit committee meetings are not significantly associated with the decision to engage auditors in interim reporting. Taken overall, these findings suggest that an effective audit committee is associated with a review of interim reports by external auditors.

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Save Money to Lose Money? Implications of Opting Out of a Voluntary Audit Review for a Firm’s Cost of Debt*

Porumb

Karaibrahimoglu

Wang

et al. 2022

European Accounting Review

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An audit review (AR) is a mechanism used by boards to assess the quality of interim financial reports on a timely basis. In Canada, the AR is voluntary, with listed firms mandated to disclose when they choose not to purchase additional audit verification. Given the relatively low cost of an AR, opting out of it can be regarded as a negative signal, especially in the context of lenders' sensitivity to downside risk. Using a sample of 7,585 firm-year observations from 1,616 public firms in Canada over the period 2004-2015, we document that firms without a voluntary AR have a higher cost of debt than firms with an AR. Furthermore, after firms opt out of the AR, the increase in the cost of debt is accompanied by a rise in discretionary abnormal accruals and managers' stock-based compensation. Moreover, no-AR firms are more likely to reduce post-switch private borrowing and have lower equity analyst following. Overall, we document benefits for managers who forgo the AR. Our study is the first to document that although listed borrowers that opt out of an AR have a higher cost of debt financing, they are concurrently able to engage in more earnings management and grant their managers higher stock-based compensation because of lower external monitoring.

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The Effect of the External Accountant's Review on the Timing of Adjustments to Quarterly Earnings

Cited by 22 publications

References 6 publications

Interim reviews and the association between partner rotations and audit fees

Interim reviews and the association between partner rotations and audit fees

Audit Committees and Voluntary External Auditor Involvement in UK Interim Reporting

Save Money to Lose Money? Implications of Opting Out of a Voluntary Audit Review for a Firm’s Cost of Debt*

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