The Impact of Audit Completeness and Quality on Earnings Announcement GAAP Disclosures

Self Cite

There has been a substantial increase, since 2004, in the number of firms that announce annual earnings before audit completion as opposed to after audit completion. In this study, we argue that earnings announced before audit completion are associated with lower financial reporting quality and investor perceptions that earnings are more likely to be overstated. Consistent with this expectation, we document that the market places more (less) weight on good (bad) earnings news for earnings announced after audit completion relative to earnings announced before audit completion. We continue to find this differential market response when we expand the returns window to include the 10‐K filing date, suggesting that the differential response is not driven by investors' temporary concerns about earnings revisions between the earnings announcement and the 10‐K filing date or by differential GAAP disclosures in the earnings announcement, as suggested in prior research. Finally, as a direct test of financial reporting quality, we show that earnings announced with a completed audit are less likely to be restated in the future, are less likely to meet or beat expectations, and are associated with fewer income‐increasing discretionary accruals than those announced with an incomplete audit.

Section: Introductioncontrasting

confidence: 73%

An Incomplete Audit at the Earnings Announcement: Implications for Financial Reporting Quality and the Market's Response to Earnings

Marshall

Schroeder

Yohn

2019

Self Cite

“…They also find that earnings announcements made prior to the audit report date are more likely to be restated and are, therefore, of lower quality. Schroeder () also finds that companies releasing their earnings announcements after the financial statement audit is complete include more GAAP disclosures in their announcements. Marshall et al () present evidence that after PCAOB AS 2/3, firms made more earnings announcements before the audit was completed.…”

Section: Resultsmentioning

confidence: 99%

“… Bronson et al () and Schroeder () present statistics to show that earnings announcements lags and audit report lags grew during the sample period I study but that they did not increase proportionately. Bronson et al () present evidence of a substantial decrease in the percentage of firms that waited until the audit was complete to issue their earnings announcements, while Schroeder () presents statistics suggesting that both earnings announcement and audit report lags were growing at this time, but audit report lags were growing much faster. …”

mentioning

confidence: 94%

“…I find additional evidence that other regulatory changes for auditors are also associated with the timing of management's earnings announcements. Prior studies have identified consequences related to PCAOB regulations regarding the timing of the audit, which is closely associated with the timing of the earnings announcement (e.g., Bronson et al ; Schroeder ; Marshall et al ). My results regarding the change in earnings announcement timing are robust to a series of sensitivity analyses that control for additional GAAP and non‐GAAP earnings announcement disclosures, and other audit characteristics.…”

Section: Introductionmentioning

confidence: 99%

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The Effect of Regulation on the Timeliness and Informational Role of Earnings Announcements

Pawlewicz

2018

This paper examines the effect of regulations (i.e., the Sarbanes‐Oxley Act and Regulation G) on both the timing of earnings announcements and their relative informational role. I find that after the regulation of earnings announcements was instituted, firms began issuing less timely earnings announcements, and those announcements have become more important for shareholders. Ceteris paribus, after the regulations, firms have disclosed their fiscal year‐end announcements more than four days later than they had prior to regulatory changes. My results are robust to sensitivity analyses that control for concurrent earnings announcement disclosures and other changes instituted by the Sarbanes‐Oxley Act. Further, I find evidence suggesting that the relative informational role of earnings announcements has increased significantly in the post‐regulation period. This study highlights a shift in both the timeliness and investor perceptions of earnings announcements spurred by the implementation of regulatory oversight, indicating a trade‐off of timeliness for relevance.

“…Prior research shows that in 2001, more than 70 percent of companies waited until after the audit report date to announce earnings, but that this percentage declined to less than 10 percent by 2011 (see, e.g., Krishnan and Yang ; Bronson et al. ; Schroeder ). Importantly, auditors have no responsibility for the results presented in these unaudited earnings announcements.…”

Section: Empirical Predictionsmentioning

confidence: 99%

The Consequences of Audit‐Related Earnings Revisions

Haislip

Myers

Scholz

et al. 2017

In this study, we investigate the consequences that auditors and their clients face when earnings announced in an unaudited earnings release are subsequently revised, presumably as a result of year‐end audit procedures, so that earnings as reported in the 10‐K differ from earnings as previously announced. Specifically, we examine whether the likelihood of an auditor “losing the client” is greater following such revisions, and whether the likelihood of dismissal is influenced by revisions that more negatively impact earnings, that cause the client to miss important earnings benchmarks, by greater local auditor competition, or by auditor characteristics. We also examine audit pricing subsequent to audit‐related earnings revisions for evidence of pricing concessions to retain the client. Finally, we examine whether client executives experience a greater likelihood of turnover following an audit‐related earnings revision. Consistent with expectations, we find that auditor dismissals are more likely following audit‐related earnings revisions. We also find that dismissals are more likely when revisions cause clients to miss important benchmarks and when there is greater local auditor competition. Among nondismissing clients, we find that future audit fees are lower when the effect of the revision on earnings is more negative, consistent with auditors offering price concessions to retain clients when revisions are more displeasing. We also find a greater likelihood of future chief financial officer (CFO) turnover as the effect of the revision worsens. Our findings offer important insights into the consequences that auditors face when balancing their responsibility for high audit quality and client satisfaction, as well as into the consequences that CFOs face when releasing inflated but not fully audited earnings.