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  • Jennifer M Mueller-Phillips
    The Impact of Audit Completeness and Quality on Earnings...
    research summary posted March 31, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 14.0 Corporate Matters, 14.08 Press Release Language and Signaling 
    Title:
    The Impact of Audit Completeness and Quality on Earnings Announcement GAAP Disclosures.
    Practical Implications:

    The results of this study are important for regulators when considering the potential impact of the timeliness of audits and the subsequent impact on capital markets. The focus of the PCAOB is to improve the quality of public company audits and to ensure higher quality financial reporting for all stakeholders. However, higher quality audits may come at the cost of less timely financial information. This study indicates that this in turn can influence firm voluntary disclosure behavior. Consequently, this result could have potentially negative consequences for investors seeking the timeliest information possible.

    Citation:

    Schroeder, J. H. 2016. The Impact of Audit Completeness and Quality on Earnings Announcement GAAP Disclosures. The Accounting Review 91 (2): 677-705.

    Keywords:
    audit completeness, audit quality, earnings announcement, PCAOB standards, GAAP disclosures
    Purpose of the Study:

    Annual earnings announcements are important disclosures that public companies provide investors. Prior research indicates that earnings announcements are more informative to investors when the disclosures contain more detailed GAAP disclosure information. This is consistent with best practices supplied by regulators and practitioners which strongly encourage companies to include in their annual earnings announcements more detailed GAAP financial statement information.

    Due to its informativeness, most companies release their annual earnings announcement in advance of the completed year-end audit. However, regulators and practitioners recommend that companies not only include the external auditor in the earnings announcement disclosure review process, but also wait until the audit is complete or substantially complete prior to releasing the earnings announcement. This situation creates the possibility that audit completeness and auditor quality influence the firms disclosure behavior related to the annual earnings announcement. In spite of stated best practices, companies face strong market demand pressures to release more timely information, and existing regulatory requirements do not require auditor oversight before releasing this information. Thus, the extent to which audit completeness and audit quality influence the level of GAAP information included in annual earnings announcement disclosures remains unclear. Below are two primary objectives addressed by the author:

    • Examines whether the level of completeness of the audit on the date of the annual earnings announcement influences the level of GAAP information provided in the disclosure. Management may be more willing to disclose additional GAAP information when there is a more complete audit as of the earnings announcement date because management may have greater confidence in the underlying financial statement balances.
    • Examines whether the quality of the audit influences the level of GAAP information provide in the disclosure. Management may be more willing to disclose additional GAAP information when a higher quality audit is performed because management may have a higher level of confidence in the accuracy of the financial reporting system.
    Design/Method/ Approach:

    The author uses data on publicly traded U.S. firms from the years 2001-2011 to examine how the level of completeness of the audit, as well as audit quality influences the amount of GAAP financial information included in annual earnings announcements which occur in advance of the audit completion date. The level of audit completeness was calculated as the difference between the annual earnings announcement date and the audit report date. Audit quality was measured as either the level of audit fees paid by the company, or whether the firm engaged a Big 4 auditor.

    Findings:
    • Annual earnings announcements for firms in which the audit is closer to completion include higher levels of GAAP financial information as part of the disclosure.
    • Annual earnings announcements for firms in which the audit is of a higher quality include higher levels of GAAP financial information as part of the disclosure. These results indicate that management is more likely to provide more detailed earnings announcement GAAP disclosures when the annual audit is more complete or when the external auditor is higher quality.
    • The increase in disclosed GAAP information for firms with more complete audits or audits from higher quality auditors is driven primarily by an increase in disclosure related to balance sheet and cash flow statement information
    Category:
    Corporate Matters, Standard Setting
    Sub-category:
    Impact of PCAOB, Press Release Language & Signaling
  • Jennifer M Mueller-Phillips
    Are Seemingly Self-Serving Attributions in Earnings Press...
    research summary posted July 16, 2015 by Jennifer M Mueller-Phillips, tagged 14.0 Corporate Matters, 14.05 Earnings Targets and Management Behavior, 14.08 Press Release Language and Signaling 
    Title:
    Are Seemingly Self-Serving Attributions in Earnings Press Releases Plausible? Empirical Evidence.
    Practical Implications:

    The finding that investors distinguish the plausibility among seemingly self-serving attributions based on concurrent industry performance and earnings commonality suggests that investors are somewhat sophisticated when interpreting these narrative disclosures. This study should be of interest to policymakers who advocate the importance of narrative disclosures. A potential concern that policymakers face is that managers can use unregulated narrative disclosures to manipulate investor perceptions, particularly if investors accept managers’ self-serving pronouncements uncritically. These findings mitigate this concern because investors appear to be sophisticated enough to use relevant information to distinguish the plausibility of seemingly self-serving attributions. Apparently, providing self-serving attributions purely to mislead investors may not be an effective strategy.

    Citation:

    Kimbrough, M. D., & Wang, I. Y. 2014. Are Seemingly Self-Serving Attributions in Earnings Press Releases Plausible? Empirical Evidence. Accounting Review 89 (2): 635-667.

    Keywords:
    attribution, narrative disclosure, plausibility, earnings announcements
    Purpose of the Study:

    Managers often provide causal explanations for earnings news by linking earnings performance to internal actions or to external causes. These attributions potentially help investors assess the implications of current earnings news, such as earnings persistence. A well-documented pattern from prior research on attributions is that managers are more likely to attribute good news to internal causes (enhancing attributions) and bad news to external causes (defensive attributions). Managers presumably provide such seemingly self-serving attributions to heighten (dampen) investors’ perceptions of the persistence of good (bad) earnings news, thereby increasing (decreasing) the market reward (penalty) for good (bad) earnings news.

    Investors face a challenge when interpreting seemingly self-serving attributions because they may provide unbiased information about future earnings or they may reflect managers’ psychological biases or opportunism. In this study, the authors examine the information that investors appear to rely upon when assessing the plausibility of seemingly self-serving attributions in earnings press releases. Specifically, the authors test whether the market’s reactions to earnings announcements that contain seeming self-serving attributions vary with:
    (1) The concurrent performance of other firms in the same industry, and 
    (2) The commonality of the firm’s earnings with the market and its industry, defined as the historical degree of co-movement between a firm’s earnings and market- and industry-level earnings.

    Design/Method/ Approach:

    Using a sample of earnings press releases from 94 randomly selected firms from 1999 to 2005, the authors document cross-sectional differences in the market’s response to earnings announcements that contain either defensive or enhancing attributions that are consistent with the predictions.

    Findings:

    The authors find that firms that provide defensive attributions to explain earnings disappointments experience less severe market penalties when:
    (1) More of their industry peers also release bad news, and
    (2) Their earnings share higher commonality with industry- and market-level earnings.

    On the other hand, firms that provide enhancing attributions to explain good earnings news reap greater market rewards when:
    (1) More of their industry peers release bad news, and
    (2) Their earnings share lower commonality with industry- and market-level earnings.

    Collectively, the results suggest that investors neither completely ignore seemingly self-serving attributions nor accept them at face value, but use industry- and firm-specific information to assess their plausibility. Further analyses reveal that investors’ use of industry peer performance and earnings commonality information appears justified because investors’ perceptions are consistent with the association between the plausibility measures and the ex post actual persistence of earnings surprises.

    In supplemental analysis, the authors find that the pattern of the effects of the plausibility factors observed for the seemingly self-serving sample does not extend to the non-self-serving sample, indicating that investors use these measures to assess plausibility only when seemingly self-serving attributions exist.

    Category:
    Corporate Matters
    Sub-category:
    Earnings Targets & Management Behavior, Press Release Language & Signaling

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